===== PAGE 1 ===== [ Junetoos ~~ Vol.43,No6 | THEFREEMAN IDEAS ON LIBERTY PE — FEATURES 324 In Memoriam: Yale Brozen by David Henderson 326 The Attack on Concentration by Yale Brozen In defense of “dominant” firms and “shared monopoly.” 334 The Ghost of John D. Rockefeller by Thomas J. DiLorenzo Similarities between Microsoft and the old Standard Oil organization. 338 Economics: A Branch of Moral Philosophy by Leonard E. Read On beyond economic scientism. 344 Natural Society Revisited by Juliana Geran Pilon The original conception of civil society. 347 The Origin of Religious Tolerance by Wendy McElroy Voltaire’s enlightening observations. 351 A Peaceful Ferment in Somalia by Spencer Heath MacCallum An absence of a central government has its advantages. 358 Statistics: A Vehicle for Collectivist Mischief by John T. Wenders When aggregated, individual action and choice are obscured. 362 Should Government Build the Railroads? by Burton Folsom, Jr. The case of Stevens T. Mason and Michigan. COLUMNS Center NOTES from FEE—Foolish Inconsistencies by Donald J. Boudreaux 332 IDEAS and CONSEQUENCES—Trust Not in What Your Government Can Do for You by Lawrence W. Reed 342 POTOMAC PRINCIPLES—Institutional Immortality, Washington Style by Doug Bandow 356 PERIPATETICS—The Idiocy of Autocracy by Sheldon Richman 360 ECONOMIC NOTIONS—The Power of Incentives by Dwight R. Lee 369 ECONOMICS on TRIAL—Great Turnabouts in Economics, Part II by Mark Skousen 383 THE PURSUIT of HAPPINESS—Cinema and the Capitalist Hero by Edward W. Younkins DEPARTMENTS 322 Perspective—Yale Brozen by Sheldon Richman 372 Book Reviews *The Mainspring of Human Progress by Henry Grady Weaver, reviewed by William H. Peterson; Property Rights in the Defence of Nature by Elizabeth Brubaker, Property Matters by James V. DeLong, Property Rights: Understanding Government Takings and Environmental Regulation by Nancie G. Marzulla and Roger J. Marzulla, reviewed by Bruce Yandle; Makers and Takers: How Wealth and Progress Are Made and How They Are Taken Away or Prevented by Edmund Contoski, reviewed by Daniel Hager; The Tyranny of Gun Control, edited by Jacob G. Hornberger and Richard M. Ebeling, reviewed by George C. Leef; Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise by Edmund S. Phelps, reviewed by Charles W. Baird; How Nations Grow Rich: The Case for Free Trade by Melvyn Krauss, reviewed by Daniel T. Griswold. 381 Capital Letters ===== PAGE 2 ===== Ce THEFREEMAN DEAS On useRTY PERSPECTIVE Yale Brozen Published by The Foundation for Economic Education Good economists do two things. First, they Capp a SLE 4) 591-8910 challenge peoples intuitions. (Such as: social E-mail: freeman@fee.org order requires design; more people mean FEE Home Page: http://www .fee.org fewer resources; high market share indicates a President: Donald J. Boudreaux lack of competition.) Then they make people Editor: Sheldon Richman say, “Oh, that’s simple; I should have thought Managing Editor: Beth A. Hoffman of that.” Editor Emeritus By that standard, Yale Brozen, a former Paul L. Poirot member of the University of Chicago Gradu- Book Review Editor ate School of Business faculty and the FEE eons ee Board of Trustees, qualifies as a very good Editorial Assistant . Mary Ann Murphy economist. Columnists Brozen died March 4 at the age of 80. The Charles W. Baird obituary in the San Diego Union Tribune paid Doug Bandow him the highest compliment an economist can Dwight R. Lee be paid. It said his “persuasive arguments and L W. Reed i i i i awrence W. Ree tenacious scholarship helped revive wide- Mark Sk Walter Wil spread acceptance of free-market economics.” . . That aptly describes Yale Brozen. He was part Contributing Editors ) 1 Peter J. Boettke of that revival precisely because he could do Clarence B. Carson what too few economists can: he could write Thomas J. DiLorenzo for the non-economist. He did it, among many Burton W. Folsom, Jr. venues, in the pages of The Freeman. In Joseph S. Fulda December 1966 he wrote his first Freeman Bettina Bien Greaves article, “Welfare Without the Welfare State.” Robert Higgs Then in September 1967 he contributed “Rule John Hospers by Markets Versus Rule by Men.” That article was followed by “The Untruth of the Obvi- ous” in June 1968, “The Attack on Concentra- Raymond J. Keating Daniel B. Klein Wendy McElroy Tibor R. Machan tion” in January 1979, and “The Mythology of Ronald Nash Energy” in July 1979. Edmund A. Opitz We are pleased to reprint “The Attack on James L. Payne Concentration” in the present issue. Some of William H. Peterson Brozen’s most important work was in the area Jane S. Shaw of economics called “industrial organization.” Richard H. Timberlake Theoretically and empirically, he showed that Lawrence H. White a high market share for a dominant firm, The Freeman is the monthly publication of The Foundation for Eco- absent government barriers to entry, was nomic Education, Inc., Irvington-on-Hudson, NY 10533. FEE, . . . “le . established in 1946 by Leonard E. Read, is a non-political, educational consistent with vigorous competition. With champion of private property, the free market, and limited government. . . - FEE is classified as a 26 USC 501(c)(3) tax-exempt organization. the Department of Justice [sic] persecuting Copyright © 1998 by The Foundation for Economic Education. Per- 1 : mission is granted to reprint any article in this issue, provided credit is Microsoft for having too many customers for given and two copies of the reprinted material are sent to FEE. its computer operating system, Brozen’s arti- The costs of Foundation projects and services are met through dona- . . tions, which are invited in any amount. Donors of $30.00 or more cle is as important as ever. Clearly, the attor- receive a subscription to The Freeman. For foreign delivery, a donation of $45.00 a year is suggested to cover mailing costs. Student subscrip- neys in the department need to learn some tions are $10.00 for the nine-month academic year; $5.00 per semester. : Additional copies of this issue of The Freeman are $3.00 each. economics. . ) . Bound volumes of The Freeman are available from The Foundation Brozen began teaching business economics for calendar years 1972 to date. The Freeman is available in microform . . . . from University Microfilms, 300 N. Zeeb Rd., Ann Arbor, MI 48106. in 1957 at the University of Chicago, where Cover: Bll Gates of Microsoft. he was a colleague of future Nobel laureates 322 ===== PAGE 3 ===== AE PERSPECTIVE FA. Hayek, Milton Friedman, and George Drawing on the wisdom of an earlier writer, Stigler. He was an editorial adviser to New Juliana Geran Pilon believes that resolving Individualist Review, an important early jour- the alleged conflict lies in the insight that nal of libertarian thought edited by Ralph benevolence is a form of self-love. Raico and Ronald Hamowy at the university. Voltaire, that joyous figure of the Enlight- Brozen contributed two articles to N/R, “Wage enment, visited London early in the eigh- Rates, Minimum Wage Laws, and Unemploy- teenth century. Wandering into the Stock ment” (Spring 1966) and “The Revival of Tra- Exchange, writes Wendy McElroy, he beheld ditional Liberalism” (Spring 1965). the key to England’s peace and prosperity. In the latter he wrote, “A discussion of the There is a place on earth where there is no revival of liberalism should begin with a central government, where law arises from description of what it is—particularly since custom based on respect for the individual, our latter-day reactionaries have stolen the and where trade today flourishes. Spencer name. They have stolen the label for a good Heath MacCallum will be our tour guide. reason: it stands for the opposite of what they Contemplating how the bureaucrats use sta- propose. . . . Literally, liberalism meant to lib- tistics to justify their meddlesome work, John eralize or liberate—to make free—to permit Wenders sees numbers as the key to govern- men to do or say whatever they wished. Of ment mischief-making. Since they conceal course, there was a constraint implied in this. more than reveal, they are the perfect cover No man could do anything which affected the for intervention. liberty of others. . . . The classical liberal was Lots of good theory has been penned to and 1s opposed to all forms of tyranny.” demonstrate that government should not build Yale Brozen will be missed. and operate public-works projects, such as railroads and canals. Burton Folsom makes the same point via history, using Stevens T. Mason, a governor of Michigan in the nine- teenth century, as an example of a well- intentioned government official who learned that politics and entrepreneurship don’t mix. In “The Pursuit of Happiness,” guest columnist Edward Younkins finds a surprising number of movies that portray business activ- ity in a good light. Take this article with you next time you head for the video store. Doug Bandow talks about the budget surplus. Lawrence Reed counsels: In Government Don’t You Trust. Dwight Lee looks at the role of incentives in economics. And Mark Skousen traces the intellectual odyssey of a prominent English economic historian. Our book-review section examines the source of wealth, gun control, the connection between progress and freedom, environmen- tal concerns, free trade, and subsidies to workers. * ok ok David Henderson leads off the issue with a professional and personal appreciation of Yale Brozen, who did not have to be a house- hold name to make a real impact on econom- ic thinking. Thomas DiLorenzo goes back to the nine- teenth century to demonstrate Brozen’s point that in a free market, a dominant firm, or “trust,” signifies competition, falling prices, and expanded production. The implications for the antitrust laws and the Microsoft case are monumental. Leonard Read, FEE’s founder, liked to remind people that economics is not about numbers but about human action, choices, and values—which makes it a branch of moral philosophy. We reprint his classic arti- cle on the subject in our year-long observance of the one hundredth anniversary of his birth. Civil society is the latest fad interest among academic writers who see a conflict between individual freedom and the “social good.” —SHELDON RICHMAN 323 ===== PAGE 4 ===== IDEAS ON LIBERTY —— In Memoriam: Yale Brozen by David R. Henderson O: March 4, at age 80, Yale Brozen, a Brozen’s view, government was the source of prominent free-market economist, died. virtually all monopolies that were harmful. His For a large part of his career, Brozen was a clearest statement of that view was his essay professor of business economics at the Uni- “Is Government the Source of Monopoly?” versity of Chicago, where he was a colleague which first appeared in The Intercollegiate of Nobel prize winners Merton Miller and the Review, Winter 1968/69. I still remember my late George Stigler and other members of the thrill when, at age 18, I read that essay. In it, so-called “Chicago School” such as Lester Brozen makes a detailed empirical case with Telser, Peter Pashigian, Sam Peltzman, and example upon example of the use of govern- the late Reuben Kessel. ment power to form monopolies. With the pos- Brozen was one of the nation’s leading sible exception of George Stigler, Brozen did experts on antitrust laws, and, in virtually all the most to spread that view in the economics of his writing and speaking on antitrust, was profession and in popular writing on econom- critical of intervention by the antitrust author- ics. His 1975 book, The Competitive Economy: ities. A typical example was his paper “The Selected Readings (General Learning Press), is Attack on Concentration,” which is reprinted a collection of 42 punchy readings by various in his book Is Government the Source of economists and the best such book I know of. Monopoly? and Other Essays, published by It shows just how intensely competitive an the Cato Institute in 1980. One issue he wrote unregulated economy is and how antitrust laws about in that essay was a Federal Trade Com- can do damage. One of its best sections mission complaint against Du Pont. What was includes six articles that refute the idea that Du Pont’s alleged crime? That it had “adopted predatory pricing 1s a sensible strategy for and implemented a plan to expand its domes- firms that would like to have a monopoly. tic production capacity.” Brozen commented: The dominant view among economists in “In whatever way I torture the phrases in the the field of industrial organization in the antitrust law, I simply cannot get it to say that 1960s was that industries with a few firms expanding trade is illegal despite the thunder were monopolistic and that this explained in the FTC complaint.” why profit rates were higher in concentrated Brozen’s view of the harm done by antitrust jndustries than in unconcentrated ones. was based on his belief that economies in Harold Demsetz, a former Chicago colleague which governments refrain from creating who moved to UCLA in 1971, dubbed this the monopolies are intensely competitive. In «market concentration doctrine.” Brozen, David Henderson is a research fellow at the Hoover with Demsetz, was a modern-day Schum- Institution and an economics professor at the Naval peterian who saw a dynamic competitive Postgraduate School in Monterey, California. process at work. In industries in which a few 324 ===== PAGE 5 ===== 325 companies had a large market share, they A memorial note on Yale Brozen is not believed, concentration didn’t cause high complete without a reference to his sense of profits. Rather, concentration and high profits humor, his passion, and his humanity. Yale were caused by successful competition. In his was a man who liked a good laugh and who 1982 book, Concentration, Mergers, and cared passionately about his work because he Public Policy (Macmillan), Brozen weaves cared about people. I remember the first time together evidence from Demsetz and other I met him, while I was a junior economist in economists, along with his own findings, to the Nixon White House in the summer of drive home that point. 1973. One of my UCLA professors, George Interestingly, although Brozen never Hilton, was in town and had organized a din- seemed to come across an antitrust suit he ner to which he invited Yale, Ross Eckert liked (perhaps he just didn’t write about (since deceased), and me. We had a great those), to my knowledge he was never willing time, laughing about the Washington absurdi- to advocate abolishing antitrust. I believe his ties we were seeing all around us and hesitancy was due to his acceptance of the exchanging information about how, like “perfectly competitive” model as an ideal. In McGruff the crime dog, we could take our lit- fact, it was partly to nudge him gently toward tle bite out of government. At that dinner, Yale abolition that I wrote my preface to his 1980 encouraged me a lot, as did Hilton, to push for collection of essays. transportation deregulation. Of course, that But Brozen was much more than a scholar was also Watergate summer, when the hear- of industrial organization and antitrust. He ings on the scandal were capturing the whole was also a policy activist, in the best and most town’s attention and Nixon was stonewalling honorable sense of that term. In the early Congress’s attempt to make him cough up 1970s, Brozen noticed that economists crucial information. It was also price-control around the country were writing solid acade- summer, when Nixon’s hated economic pro- mic articles critical of much government reg- gram (hated by everyone at that dinner, at ulation—of trucking, oil prices, natural-gas least) was causing serious shortages of gaso- prices, and. pharmaceuticals, to name four line and many other goods, including with prominent examples. So, as an adjunct schol- poetic justice, steak in the White House mess. ar with the Washington-based American Toward the end of the evening, Eckert, who Enterprise Institute, he gently pushed many of was also working in the Nixon administration, these economists to write rigorous mono- announced, “Well, gentlemen, I’m leaving. graphs that a general audience could under- I’ve got to get up early in the morning and stand. According to Marvin Kosters, director work for my President.” of economic policy studies at AEI, “Yale I decided to take a chance. “I'd better leave, Brozen contributed more than any other too,” I announced, grinning. “I’ve got to get up scholar to establishing the credibility of the even earlier to work against my President.” Yale Institute’s research studies in the 1970s.” laughed spontaneously and his eyes twinkled. Major deregulations occurred in oil, natur- From then on I was friends with Yale. I just al gas, and trucking within five to eight years wish that I had called him sometime in the last of these studies. Often when I ship goods by five years. I hadn’t even known that he had truck, I silently thank my Hoover colleague moved to San Diego four years ago. I'm not Thomas G. Moore for his devastating 1972 unusual. While researching this article, I talked study, Freight Transportation Regulation, and to one economist who, after leaving Chicago Yale Brozen for getting him to do it. In fact, over 20 years ago, was never again in touch as an economist with the Council of Econom- with him even though he liked both Brozen and ic Advisers in 1973, I used information from his work. Theres a lesson here. We, especially Moore’s study to persuade my boss, chairman men, need to break our pattern of isolation and Herb Stein, to keep the council pushing for express our appreciation of people before they transportation deregulation within the Nixon die. I'm doing way better than I did years ago, administration. and I’ve still got a long way to go. 0 ===== PAGE 6 ===== Freeman Classic Reprint The Attack on Concentration by Yale Brozen (Editor’s Note: Yale Brozen, former member did it do that but it is going on to enlarge its of FEE’s board of trustees and a retired pro- capacity, building a new plant at De Lisle, fessor of business economics at the Universi- Mississippi, in order to serve even more cus- ty of Chicago, died March 4. Reprinted below tomers (who also would like to obtain domes- as a memorial is his article published in The tic titanium dioxide at low cost). Can you Freeman, January 1979. It is especially time- imagine that any enterprise would engage in ly because of the government’s current legal such a nefarious activity? It should, according action against Microsoft.) to the Federal Trade Commission (FTC), behave like a monopolist. It should restrict its Ox we gave high regard to those who output, instead of expanding, and charge created great enterprises by designing higher prices (and let the business go to for- desirable products, producing them at low eign firms). cost, and offering them at such attractive prices that they won a large body of cus- tomers. Henry Ford, in his day, was looked upon as an industrial hero. Today, he would be That is a total perversion of the intent of regarded as a monopolizing fiend upon whom our antitrust law. If the FTC is not standing the antitrust prosecutors should be unleashed. antitrust law on its head, then I simply do not The 1921 Ford Company, with its more than understand what our antitrust law says. The 60 percent share of the market, would today words “every contract, combination, or con- be called a dominant firm and charged with spiracy, in restraint of trade is hereby declared violating the antitrust laws. to be illegal” say that it is restraint of output Just a few months ago [1978], an antitrust that is in violation of the law. But the FTC complaint was served upon Du Pont because contends that Du Pont is violating the law it developed a low-cost method for producing because it has “adopted and implemented a titanium dioxide pigments. There was no plan to expand its domestic production capac- objection to the development of a lower-cost ity”! That quite plainly says that the FTC method of production, but Du Pont made the regards Du Pont as breaking the law by fatal error of passing enough of the cost sav- expanding trade. Is that what the law says is ing on to buyers to win 40 percent of the mar- illegal? ket served by domestic producers. Not only In whatever way | torture the phrases in the antitrust law, I simply cannot get it to say that This article is condensed from an address before the expanding trade is illegal despite the thunder Ashland, Kentucky, Economic Club, September 15, in the FTC complaint. Whenever anyone 1978. builds more capacity and uses it to produce 326 Antitrust Upside Down ===== PAGE 7 ===== 327 more product, more trade must result. I can’t its complaint, there are no differences believe that Du Pont is building a new titani- between cereals—except those artificially cre- um dioxide plant just because it wants a hand- ated in the minds of consumers by hypnotiz- some monument at which to gaze—and nei- ing them with advertising.2 Of course, if the ther does the FTC. What the FTC is com- new brands offered by the three firms in the plaining about is that Du Pont intends to 1950s and 1960s had not won a large share of produce titanium dioxide in its new plant and the market, nothing would have been wrong increase its sales—and it is nasty of Du Pont with “brand proliferation.” But the new to have already built enough plant to take care brands pleased consumers. They won for the of 40 percent of the needs of customers for three firms a large share of the market. That, domestic product. That makes Du Pont “the at bottom, is the crime these firms committed. nation’s dominant producer.” There can hard- The RTE cereal industry has become “con- ly be anything more venal than a “dominant centrated,” that is, most of the sales in the producer,” unless it is a “shared monopoly.” industry are made by a few firms. That is a condition which neither the FTC nor the “Brand Proliferation” Through Antitrust Division intends to tolerate. . so The FTC staff also has accused the eight Hyp notic Advertising major petroleum refiners of engaging in a “Shared monopoly” sounds like a label for “shared monopoly” in the petroleum-refining a conspiracy among several firms to monopo- industry. It is asking that these corporations lize a market and share the fruits of that be broken into smaller companies. The major monopoly. But that is not what the FTC crime of which the Big Eight stand accused is means by the label. The phrase is FTC code that of maintaining a “noncompetitive market for a few firms winning and holding a large structure.” This phrase is never cogently share of the business in some product line. defined by the FTC staff, but “concentration” The FTC staff is currently prosecuting Kel- seems to be the nub of it. Complaint counsel logg, General Foods, and General Mills for says the eight companies “are well vertically “sharing a monopoly” of ready-to-eat (RTE) integrated firms with substantial horizontal cereals. These three firms have managed to concentration at every level of the industry” produce and distribute cereals that taste good (emphasis supplied).? Counsel also says the enough and cost consumers little enough to eight “own and operate refineries accounting win more than three-quarters of the RTE busi- for approximately 65 percent of rated crude ness. That is their crime. oil refining capacity in the relevant market.” Did these three firms conspire with each Even more damning, “This figure . . . under- other to somehow force other firms out of the states concentration . . . because [the eight industry and then conspire to reduce supplies firms]. . . utilize more of their refining capac- and raise prices? The FTC disavows any accu- ity than other refiners. Hence [their] share of sation of any such conspiracy. It says that the production of refined petroleum products . . . crime of which these firms are guilty is is higher than their share of rated refinery “brand proliferation.” The heinous conduct of capacity. . . .” which it accuses these firms is that of trying to Again, here is the accusation that these give consumers what they want. It is now a alleged monopolists are not behaving like crime, that is, the FTC is trying to make it a monopolists. Instead of restricting output and crime, to follow that old merchandising restraining trade, they push their capacity maxim for success, “give the lady what she harder than do their competitors and expand wants.” output and trade. Apparently they are unaware The cereal companies should have stuck to of the fact that they are monopolists who can producing corn flakes. Never mind the get higher prices by restricting output. Again, demand for a bran cereal, or a high-protein the FTC is displeased by efforts to expand cereal, or a vitamin-enriched cereal, or a trade and is standing antitrust law on its head presweetened cereal. Anyway, says the FTC in by saying that the failure to restrict trade is a ===== PAGE 8 ===== 328 THE FREEMAN e JUNE 1998 violation of the law. The FTC even accuses “dominance” by a single firm to be illegal in the companies of building pipelines to pro- and of itself. Standard Oil and American vide themselves with “cheap transportation.” Tobacco were broken up in 1911 because they Again, as in titanium dioxide, it is apparently had been built by a very large number of illegal to reduce costs and pass enough of mergers of monopolistic proportions with these cost savings on to customers to win an wrongful intent and had then engaged in “acts appreciable share of the market. (In the petro- and dealings wholly inconsistent with the the- leum case, we cannot say a “large” share of ory that they were made with the single con- the market has been won since no petroleum- ception of advancing the development of refining firm sells as much as ten percent of business . . . by usual methods. . . ” The the petroleum products sold in the United defendants failed to show that the intent States.) underlying their mergers and their acts was These three cases are cited to show the the normal one of efficiency and expansion of current state of antitrust doctrine at the trade—they failed to show “countervailing antitrust agencies. The question remains of circumstances” in Chief Justice Edward whether the courts will buy this upside-down White’s phrase. They were, therefore, subject- view of antitrust law in view of its legislative ed to antitrust remedies. The remedies were history.4 not applied because of their dominance but because they were formed and maintained by Antitrust Not Intended to monopolizing acts and intent—that is, by a desire to gain control of the supply of a prod- uct and to use that control to charge a monop- When federal antitrust policy began, with oly price and thereby restrain trade. the signing of the Sherman Act in 1890, it was aimed at benefiting consumers. In the words Dominant Firms Do Not of Senator John Sherman, the act was to out- law arrangements “designed, or which tend, to Control Supply and Price advance the cost to the consumer.” It was nei- There is a distinction between controlling ther intended to fragment industry nor to pre- the supply of a product and producing or sell- vent occupancy of a major share of a market ing most of the supply of a product. “Domi- by one or a few firms. When Senator George nant” producers who sell a major portion of a Hoar explained to the Senate the Judiciary product’s supply usually have no control over Committee’s final draft of the bill, he declared the supply. They have no power to set any that a man who “got the whole business lower level of industry output and a higher because nobody could do it as well as he price than that which would prevail in a mar- could” would not be in violation of the Sher- ket with many suppliers and no dominant man Act. As Professor Robert Bork has point- firm. Usually, a dominant producer is the most ed out in his examination of Sherman Act leg- efficient firm in the industry. Its large output islative history, “The statute was intended to is the result of its efficiency in supplying the strike at cartels, horizontal mergers of market. The market price is as low as it would monopolistic proportions, and predatory busi- be with many producers—frequently lower. ness tactics.” As the act itself says, “Every Any attempt by a dominant firm to restrict its conspiracy in restraint of trade . . . is hereby own supply and increase price after reaching declared illegal” (emphasis supplied). a “dominant” position simply results in the Cost and price reductions and product expansion of output by other firms, the entry improvements by a firm expand the trade of a of additional firms, and loss of its dominance. whole industry. Since firms doing this fre- A dominant firm can keep its dominance only quently win a large share of the markets in by behaving competitively. The fact that there which they operate, judges in the early days of is a dominant firm, or small group of firms, in antitrust litigation did not hold “concentra- an industry is evidence of competitive behav- tion” of sales in the hands of a few firms or ior—not of monopolization. Fragment Industry ===== PAGE 9 ===== THE ATTACK ON CONCENTRATION 329 The lack of ability of a dominant firm (or These are the most successful monopoliz- group of firms) to control supply and price ing cases I can find aside from the Air Line simply because it produces a major part of the Pilots Association, the Teamsters, and similar supply of a product is illustrated by the expe- labor unions.® What they demonstrate is that a rience of the automobile industry in 1927. dominant firm quickly ceases to have any From 1921 to 1925 the Ford Motor Company influence in the market if it charges a supra- supplied more automobiles than all other competitive price. In some cases a dominant firms combined. The Ford Company was a firm willing to restrict output greatly has no dominant firm. It completely shut off its sup- ability to obtain a supracompetitive price even ply to the market for nearly the entire year in in the short run. 1927 when it closed down to retool for the change from the Model T to the Model A. If ror the fact that a firm supplies the majority of a Shifting Market Shares market gives it any power to control supply Dominant firms, that is, firms which sell a and price, then the complete withdrawal of major part of all product sold, remain domi- that firm’s supply should certainly cause arise nant only if they charge the competitive price in price. Yet the prices of automobiles failed and are more efficient than other firms in their to rise when Ford shut down despite its having industries. If they are less efficient, they soon been the dominant producer. Other manufac- find their market share dwindling despite sell- turers increased their output and prices fell by ing at competitive prices. The Big Four in the mid-1927 despite the complete withdrawal of meatpacking industry, for example, has seen the Ford supply of newly manufactured cars its share of the market dwindle from 56 per- from the market.6 cent in 1935 (and from an even higher share The fact that a dominant producer has, at in earlier years) to 47 percent in 1947 to 38 most, a very short-lived ability to influence percent in 1956 to 22 percent in 1972.9 The the price of a product can be illustrated by relative inefficiency of the Big Four showed in numerous anecdotes. The American Sugar the 1920s when their rates of return on invest- Refining Company merged 98 percent of the ment ran at one-third the rate earned by smali- capacity for refining sugar east of the Rockies er companies.10 That situation continued up to in 1891 and 1892. By cutting production it at least 1972, and market share of these inef- managed to raise refining margins by 40 per- ficient firms fell. cent in 1893 (which raised the price of sugar The Big Four meat-packers (the Big Five by 8 percent). Expansion of output in other in the 1917 FTC investigation) originally firms cut sugar-refining margins in 1894 to a achieved a large market share in meatpacking level little higher than the 1891 margins by their efficiency—by instituting assembly- despite further reductions in output by Amer- line methods with complete utilization of all ican Sugar. By 1894, the entry of additional by-products. They became known for using capacity had forced margins back nearly to everything “but the squeal.” Also, their devel- 1891 levels and had cut American’s share of opment of refrigerated packing houses, cold the sugar business by one-quarter. American storage, the refrigerator car, and an efficient was still a dominant firm by today’s FTC def- distribution system created enlarged markets inition, but it had lost all influence over price for meat supplied from cheaper livestock and output despite its 85 percent share of sources. They grew large by being innovative. capacity.’ Once their innovations were imitated by other In 1901, American Can merged 90 percent packers, the decline of the Big Four began, of all capacity in the can business. It raised accelerating with the spread of highways and prices by one-quarter and lost one-third of its the rise of trucking. share of market in short order despite addi- The “dominance” of the Big Four did not tional buying up of competitors and their out- give them any power to restrict output or to put. Prices returned to the pre-merger level in control price. If anything, the rise of the Big a very short time. Four decreased the dominance of local mar- ===== PAGE 10 ===== 330 THE FREEMAN e JUNE 1998 kets by local butchers who had to compete tons annually, and the number of refineries with fresh meat brought in by train by the Big decreased from 60 to 27. In the same period, Four,!! especially after state laws prohibiting railroad freight rates fell by 60 percent.!2 The the sale of “foreign” meat were ruled uncon- economies of centralized production together stitutional. Nevertheless, the FTC filed one of with reduced transport costs led to larger its earliest “shared monopoly” suits in Sep- plants supplying more distant markets at tember 1948 against Armour, Cudahy, Swift, lower prices than the smaller plants resident and Wilson, accusing them of “conduct- in those markets. So the myth of “cutthroat” ing . . . operations . . . along parallel non- competition and “predatory” pricing was born competitive lines.” They had served con- in this and many other industries. Antitrust sumers too well, thus incurring the hostility of cases were brought against dominant firms local butchers in the late nineteenth century such as American Sugar, Standard Oil, Amer- and the first quarter of this century. Long after ican Tobacco, and others. local packers began outcompeting the Big Another deflation in which prices again Four, in the second quarter of the century, dropped by 25 percent, from 1929 to 1933, the FTC, in a flagrantly anticonsumer action, again led to animus against “Big Business” rode to rescue the fair maidens who by now and especially against that rising innovation in had grown mustaches and larger biceps than marketing, the chain store. The investigations the Big Four. The FTC demanded that of the Temporary National Economic Com- Armour and Swift each be broken into five mittee once again directed the country’s ire companies and that Cudahy and Wilson each toward dominant firms and industrial concen- be broken into two firms. The FTC reluctant- tration. Antitrust cases were brought against ly dropped the suit in March 1954, nearly six dominant firms such as Alcoa and A&P and years and millions in legal costs after it was against “shared monopolies” as in the Mother brought, but only because the court ruled that Hubbard case against the petroleum compa- pre-1930 behavior was irrelevant in a 1950s nies, the proceeding against the major ciga- proceeding. rette companies, and the FTC case against the Big Four in meatpacking. Currently, we are trying to find scapegoats Why Are Dominant Firms for inflation.l3 So we have brought cases . 2 against “dominant” firms such as IBM, Being Attacked? AT&T, and Du Pont, and against the “shared The attacks on concentration whether in the monopolies” already described. form of an attack on a “dominant” firm or a When we are troubled by deflation or by “shared monopoly,” seem to be fairly episod- inflation, both brought on by the government’s ic. The question to be asked is why large firms ineptness in operating our monetary and fiscal with a large share of the market are left undis- policy, the politicians export the blame to turbed for long periods and then turned on at somebody else. Mr. Carter tells us in his other times. It is not purely coincidental that speeches that the government is not at fault the nation suffered a severe deflation from for our inflation—it is up to business and 1882 to 1890, prices dropping by 25 percent labor to bring inflation to a halt. in that interval, and the Sherman Act was In this modern day, we are no longer sub- passed in 1890. At that time, the declining ject to the kind of superstitions that led the prices were blamed on “cutthroat” and early colonists to hang witches when they “predatory” competition—and this was also a were troubled by forces they did not under- time in which economies of scale in manufac- stand. Instead, in this enlightened age, when turing, combined with a rapidly declining cost we seek to rid ourselves of the causes of of transportation, led to centralization of pro- inflation and other mysterious ailments, we duction in enlarged facilities. pillory dominant firms or the Big Fours in From 1867 to 1887, for example, sugar pro- concentrated, and not so concentrated, duction doubled, from one-half to one million industries. ===== PAGE 11 ===== THE ATTACK ON CONCENTRATION 331 The Potential Losses from prices.!6 If we want to hasten our decline to Deconcentration the status of a banana republic, the attack on concentration will contribute to that end. [J] This absurd behavior by our politicians and its acceptance by the electorate as being 1. FTC News Summary, April 14, 1978, p. 1. Emphasis supplied. something more than a hunt by politicians for 2. FTC Docket No. 8883, April 26, 1972. : : : : 3. Complaint Counsel’s Prediscovery Statement, In the Matter of witches to blame for their own mistakes might = Corporation, et al,, Docket No. 8934, pp. 7-10. be tolerable if it were nothing more than 4. The Court did accept this upside-down view in reversing the : : PR lower court in the Alcoa case. Yale Brozen, “Antitrust Out of Hand,” expensive entertainment of voters. But it is pf tr vel. 11. 10. 3 (March 1974). [The something more. It is counterproductive in government did not prevail in any of these cases.—Ed.] _ : : 5. Robert Bork, The Antitrust Paradox (1978), p. 20. terms of the ends we seek less inflation, 6. Federal Trade Commission, Report on Motor Vehicle Industry higher rates of growth, and improved levels of (Washington, D.C. U.S. Government Printing Office, 1939). living 7. Richard Zerbe, “The American Sugar Refinery Company, © . . 1887-1914; The Story of Monopoly,” Journal of Law & Economics, Prices have gone up less rapidly in our most vol. 12 (1969), pp. 353-57. : : : 8. Yale Brozen, “The Consequences of Economic Regulation,” concentrated industries than in others and , “-°" 4, vol. 13 (June 1975) productivity has grown more rapidly. From 9. The 1956 and subsequent figures overstate the share of market 1967 to 1973, prices in our most concentrated retained by the original Big Four since Cudahy was displaced by . . . ormel. industries rose less than half as rapidly as 10. Ralph C. Epstein, Industrial Profits in the United States (New : : : 14 York: National Bureau of Economic Research, 1934), reports that 23 prices In all manufacturing. From 1958 to leading meat-packers earned 1.9 percent on equity in 1928 while 46 1965, prices in our most concentrated manu- minor meat-packers earned 10.0 percent. In 1964, leading packers facturing industries actually fell while prices “72 Bee Se ome Bk ee Mnopoly,” The in other manufacturing industries rose. Yet it Atantic Monthly (1924), reprinted in The Freeman (September . . . . 1960). 1S our concentrated industries with a Superior 12. The average rail rate fell from 19 mills per ton-mile to 7.5 record for moderating inflation and a superb mils. : : HE 13. J. Cotlin, “Increased Corporation Antitrust Suits Prompt record for increasing productivity that are : go f } . a Industry Fears of New Federal Policy,” National Journal Reports, being cast in the role of economic villains.!5 September 15, 1973, p. 1371. 3 : _ : : 14. Steven Lustgarten, Industrial Concentration and Inflation If this witch-hunt continues, the result will {Washington, D.C.: American Enterprise Institute for Public Policy be economic disaster. If we deconcentrate all Research, 1975), Table 2. : : : : : . Shirley Scheibla, “Monopoly the Villain,” Barron's, Novem- our manufacturing industries in which four 15. Shirley : : ; ber 4, 1974, pp. 9, 18-20; “Economic Concentration: The Perennial firms produce and sell more than 50 percent Fall Guy,” First National City Bank Monthly Economic Letter, April 1972 Y of the product, the result will be a 20 percent 16. Sam Peltzman, “The Gains and Losses from Industrial Con- rise in costs and a 10 to 15 percent rise in centration,” Journal of Law & Economics, vol. 20 (October 1977). The power of one. “There is really nothing that can be done except by an individual. Only individuals can learn. Only individuals can think creatively. Only individuals can cooperate. Only individuals can combat statism.” —LEONARD E. READ founder of FEE And only your individual help can make The Freeman grow! Enter or extend your own subscription, or send a sample copy to a friend, neighbor, or business associate. Please see reply envelope. Call (800) 452-3518 for details. ===== PAGE 12 ===== Ideas and Consequences by Lawrence W. Reed Trust Not in What Your Government Can Do for You wo so much talk these days of scandal, cent think government “hinders the American incompetence, and failed programs, Dream.” trust in government is on the ropes. To some The National Election Studies (NES) Trust people, this development is lamentable. They in Government Index tells us that a mere 31 are busy writing columns and editorials about percent of Americans say they trust the gov- the need to “renew our faith in democratic ernment today, about half the 61 percent who institutions.” said they did in 1966 when the Great Society But among those who understand the dif- was getting underway. If only 31 percent had ference between government in the abstract trusted the government then, perhaps we and government in reality—between what wouldn’t have—30 years and endless alphabet America’s Founders had in mind and how programs and agencies later—a $5 trillion today’s politicians actually behave—declining national debt with little to show for it but bro- trust in government evokes a contrasting ken families, an eroded currency, and dimin- view: it’s richly deserved, long overdue, and ished liberties. we should pray for more of it. To put it bluntly, it’s just plain stupid to A number of recent polls testify to a fading lament a decline in trust in government until faith in government. One from the American you find out why it’s happened. Context is Enterprise Institute and the Roper Center critical here. When the British monarchy was showed that barely more than 20 percent of perpetrating “a long train of abuses and Americans “trust government in Washington usurpations,” sending forth “swarms of offi- to do what is right ‘most of the time’ or ‘just cers to harass our people and eat out their about always.’ ” That’s down from about three- substance,” it was hardly a lamentable fact quarters of Americans in 1963. (A poll con- that American citizens lost faith in King ducted by the Pew Research Center for the George. They would have had to be deaf, People & the Press put the trust figure at 34 dumb, and generally insensate not to lose percent in February of this year) A Peter faith. Hart/Robert Teeter survey for the Council on America’s Founders did not want a govern- Excellence in Government found that only 8 ment in which the citizens placed blind confi- percent of Americans think the federal gov- dence. Thomas Jefferson was especially noted ernment “has enjoyed a large number of suc- for his desire to cultivate a healthy distrust of cesses.” The same poll revealed that 47 per- the state. To Abigail Adams in 1787 he wrote, “The spirit of resistance to government is so SE } valuable on certain occasions, that I wish it to Lawrence Reed, economist and author, is president of be al kent ali I like a little rebel- the Mackinac Center for Public Policy, a free-market O° @'WayS Kept alive. ... 1 like a little rebe research and educational organization in Midland, ~110n now and then. It is like a storm in the Michigan. atmosphere.” 332 ===== PAGE 13 ===== 333 - The steep decline in trust in government your assets whether you trust it or not. If the since the mid-1960s is proof that large num- French political philosopher Pierre-Joseph bers of Americans are awake and learning Proudhon was right (and on this score, I think something. Politicians who promised the he was), then it isn’t too much for citizens to sky delivered the proverbial mess of pottage ask their government to at least be honest with instead. Remember the assurances of how bil- them: “To be governed is to be watched over, lions of tax dollars siphoned through the fed- inspected, spied on, directed, legislated at, eral bureaucracy would solve poverty? The regulated, docketed, indoctrinated, preached result would be laughable were it not so trag- at, controlled, assessed, weighed, censored, ic, so obviously tragic that a president of the and ordered about, by men who have neither same party as Franklin Roosevelt signed a bill the right nor the knowledge nor the virtue.” in 1996 to end the federal entitlement to pub- Columnist James Glassman of the Ameri- lic welfare. can Enterprise Institute, in a February 26 col- If, after the experience of the last 30 years, umn for the Internet magazine Intellectual- Americans had lost no faith in government Capital.com, sees another kind of good news welfare programs, they would likely be diag- from the latest spate of trust-in-government nosed as possessing a prime symptom of clin- numbers. People, he says, are beginning to ical insanity: doing the same harmful thing realize that “their happiness is not dependent over and over again and expecting different on what government does. In fact, they are results each time. happy despite what government does.” Few if any polls or surveys separate out Glassman cites the remarkable results of what people think of the basic, original frame- another poll question: “Which statement work of American government from what they comes closer to your view: ‘The government think of the characters who are actually doing is responsible for the well-being of all its citi- the governing. 1 suspect that if you asked a zens and it has an obligation to help people cross section of citizens, “Do you trust the when they are in trouble,’ or ‘People are concepts embraced by the Declaration of responsible for their own well-being, and they Independence and the Constitution of the have an obligation to take care of themselves United States?” you'd get a higher number when they are in trouble.” In 1983, 43 per- than if you asked, “Did you trust Richard cent of respondents replied that the govern- Nixon after Watergate?” or “Do you trust Bill ment is responsible and 46 percent said peo- Clinton when he says he’s faithful to Hillary?” ple are responsible. In the 1997 poll, however, What’s lamentable here is that some of our the results were 16 percent for government, politicians lie, cheat, and steal. It is not lam- 66 percent for people. entable that Americans lose faith in them That shift in the years from 1983 to 1997, when they do those things. It is laudable, says Glassman, “is a refreshing develop- because it is common sense being appropri- ment.” Unless you like trillions of dollars of ately applied. debt or you think the Internal Revenue Ser- After all, what does it mean to “trust” vice is run by Mother Teresa, you have to someone or something? It means the object of agree. that trust has earned respect and confidence If Americans had really lost all faith in the through high standards of reliability, truthful- state, however, they would want to take back ness, and performance. I can think of no rea- the responsibility for their retirement years. son why governments deserve your trust any They would assume the duty of making sure more than anything or anyone else when they their children are educated. I haven’t seen fail to meet those standards. any polls yet that would suggest a majority In fact, I can think of a reason why govern- of Americans are ready for such rugged indi- ment ought to be held to even higher stan- vidualism. So in some respects we could dards: unlike private individuals or private benefit from even further erosion of “trust in institutions, it has the legal power to seize government.” 0 ===== PAGE 14 ===== THEFREEMAN @ Economics IDEAS ON UBERTY —— The Ghost of John D. Rockefeller by Thomas J. DiLorenzo Al the Senate Judiciary Committee hearing what they failed to achieve in the marketplace. on competitiveness in the computer There is indeed a lesson to be learned from industry last March, Microsoft chairman Bill Rockefeller’s antitrust ordeal, but it is not the Gates was compared to the infamous “robber one Microsoft’s critics have in mind. baron” John D. Rockefeller and his company likened to the Standard Oil Company of the ’ : late nineteenth century. Federal Trade Com- Rockefeller’s Economic Legacy mission chairman Robert Pitofsky made a The firm of Rockefeller, Andrews, and similar analogy in a Washington Post op-ed, Flagler was formed in 1865 and was a marvel where he self-servingly argued for more of efficiency because of Rockefeller’s penny- money for antitrust investigations. Gates’s pinching ways and the managerial genius of competitors, too, are working diligently to his brother William.! Even Rockefellers implant the Rockefeller analogy in the public harshest critic, the muckraking journalist Ida Consciousness. Tarbell (whose brother’s firm—the Pure Oil Even the Wall Street Journal has joined in Company—was driven from the market by the this attack; reporter Alan Murray claimed ina more efficient Standard Oil), described the com- page-one article that Gates supposedly enjoys pany as “a marvelous example of economy.” “monopoly power” that “even John D. Rocke- The efficiencies of economies of scale and feller could envy.” vertical integration caused the prices of Microsoft’s critics are right. There are many refined petroleum to fall from over 30 cents a similarities between Bill Gates’s company and gallon in 1869 to 10 cents by 1874 and to 5.9 the old Standard Oil organization. cents by 1897. During the same period, Rocke- Like Gates, Rockefeller was the victim of a feller reduced his average costs from 3 cents political assault for the “sin” of rapid innova- to 0.29 cents per gallon. tion, a vast expansion of output, and rapidly The production of refined petroleum declining prices—just the opposite of what the increased rapidly throughout this period of antitrust laws ostensibly police. As with increasing dominance by Standard Oil as Microsoft, the political attack on Standard well, as increased competition was provided Oil was launched by less-efficient rivals who by Associated Oil and Gas, Texaco, the Gulf wanted to achieve through the political process Company, and 147 independent refineries that had sprung into existence by 1911—the year PE i rnment forced the breaku Thomas DiLorenzo is professor of economics at Loy- in which the gove ent tore p ola College in Maryland and a research associate of of Standard Oil. the Competitive Enterprise Institute in Washington, Contrary to popular mythology, Standard D.C. Oil’s market share declined from 88 percent in 334 ===== PAGE 15 ===== 335 That is, they completely ignored the effects the company had on prices, output, and inno- vation in the petroleum industry, just as Microsoft’s critics tend to ignore that there are tens of thousands of software development firms in the world and that during the period of Microsoft’s rise to dominance the cost of computing has fallen spectacularly while product quality has soared. Standard Oil was convicted because of a general anti-business animus stoked by socialist intellectuals and journalists such as Henry Demarest Lloyd and Ida Tarbell and urged on by the company’s higher-cost and higher-priced rivals. As a result the most effi- cient industrial organization of the time was crippled, weakening competition and pushing prices up. The Protectionist Roots of Antitrust John D. Rockefeller oo } (1839-1937) From the very beginning, the antitrust laws have been a protectionist vehicle. While in 1890 to 64 percent by 1911. Because of theory they guard consumers against monop- intense competition the company’s oil produc- oly, in reality they politically protect uncom- tion as a percentage of total market supply petitive (but well-connected) businesses. In a had declined to a mere 11 percent in 1911, 1985 International Review of Law and Eco- down from 34 percent in 1898. nomics article, I showed that in the ten years Moreover, Standard Oil’s decades-long before the 1890 Sherman Anti-Trust Act, the price-cutting was not “predatory pricing”— industries accused of being “monopolized” by the theoretical practice of pricing below aver- trusts were all dropping their prices faster age cost to drive competitors from the market than the general price level was falling at that and establish a monopoly. Any business per- time and were expanding output faster than son would be a fool to intentionally lose GNP was growing—some as much as ten money by pricing below average cost for times faster# The late-nineteenth-century decades. As economist John McGee conclud- trusts were the most innovative and fastest- ed in his classic analysis of the Standard Oil growing industries of their time, which is why case, “whatever else has been said about [it], they were unfairly targeted by antitrust laws. the old Standard organization was seldom crit- Indeed, Congress at the time recognized the icized for making less money when it could great advantages of the trusts for consumers. readily have made more” through other Congressman William Mason stated during the means.? U.S. House of Representatives debate over the Indeed, Standard Oil never came close to Sherman Act that the “trusts have made prod- cornering the market; by the time the antitrust ucts cheaper, have reduced prices; but if the case against it was filed in 1906, it had hun- price of oil, for instance, were reduced to one dreds of competitors. Nevertheless, Standard cent a barrel, it would not right the wrong done Oil was convicted of violating the antitrust to the people of this country by the ‘trusts’ laws in 1911 and partially dissolved, despite which have destroyed legitimate competition the fact that the courts conducted no econom- and driven honest men from legitimate busi- ic analysis of its conduct and performance. ness enterprises.” Senator George F. Edmunds ===== PAGE 16 ===== 336 THE FREEMAN e JUNE 1998 undermined the manufacturing cartel that was created and sustained by the Republicans’ high-tanff policies. The Sherman Act was a political fig leaf designed to deflect attention away from the real source of monopoly power—the tariff— and the true price-fixing conspirators—Con- gress and protectionist manufacturers. The New York Times saw through this charade when it editorialized on October 1, 1890, that the “so-called Anti-Trust law was passed to deceive the people and to clear the way for the enactment of this . . . law relating to the tariff. It was projected in order that the party organs might say to the opponents of tariff extortion and protected combinations, ‘Behold! We have attacked the Trusts. The Republican Party is the enemy of all such rings.’ ”’ Economists were almost unanimously © opposed to the Sherman Act because they Bill Gates B viewed competition as Austrian school econ- omists view it—as a dynamic, rivalrous added that “Although for the time being the process of discovery.® According to historian sugar trust has perhaps reduced the price of Sanford D. Gordon, who surveyed all profes- sugar, and the oil trust certainly has reduced sional journals in the social sciences and all the price of oil immensely, that does not alter books written by economists regarding the the wrong of the principle of any trust.”’¢ late-nineteenth-century trusts, “a big majority Thus, members of Congress acknowledged of the economists conceded that the combina- that the trusts had caused lower prices to the tion movement was to be expected, that high great benefit of consumers, but objected that fixed costs made large scale enterprises eco- higher-priced businesses—many of which nomical, that competition under these new were political supporters—had lost market circumstances frequently resulted in cutthroat share or had been driven out of business. competition, that agreements among produc- The Sherman Act was a protectionist ers was a natural consequence, and the stabil- scheme in more ways than one. The real ity of prices usually brought more benefit than source of monopoly power in the late nine- harm to society. They seemed to reject the teenth century was government intervention. idea that competition was declining, or In October 1890, just three months after the showed no fear of decline.”10 Sherman Act was passed, Congress passed the McKinley tariff—the largest tariff increase in The Myth That Antitrust history up to that point. The bill was spon- » es ue sored by none other than Senator John Sher- Saved” Capitalism man himself. Sherman, as a leader of the A popular argument made at the time was Republican Party, had championed protec- that antitrust was necessary to stave off some- tionism and high tariffs since the Civil War. In thing even worse—the more extreme forms of the Senate debate over his antitrust bill he regulation or outright socialism. Antitrust was attacked the trusts because they supposedly adopted, but Americans were subjected to the “subverted the tariff system; they undermined more extreme forms of regulation—and the policy of government to protect . . . Amer- socialism—anyway. As Milton and Rose ican industries by levying duties on imported Friedman pointed out in Free to Choose, by goods.”” That is, the price-cutting by the trusts the 1970s the entire Socialist Party Platform ===== PAGE 17 ===== THE GHOST OF JOHN D. ROCKEFELLER 337 of 1920 had been adopted in the United lect his [government] subsidies” to build the States. Socialism, FA. Hayek pointed out in Northern Pacific railroad; and steel industry The Road to Serfdom, no longer meant magnate Charles Schwab, who championed nationalization of industry and central plan- the disastrous 1930 Smoot-Hawley tariff.12 ning, but rather the institutions of the welfare Their modern-day counterparts would include and regulatory state. Antitrust did nothing to many of Bill Gates’s competitors, such as the stop the spread of socialism in America. chief executive officers of Netscape, Sun Quite the contrary; the adoption of antitrust Microsystems, Novell, and other companies helped speed up the adoption of socialism. By that have lobbied the federal government to weakening the competitive process, it has led use the antitrust laws to diminish or destroy to slower productivity growth and diminished the competitive efficiency of their most effec- prosperity. Government always reacts to slow- tive rival, Microsoft. er economic growth, unemployment, and eco- For over 100 years antitrust regulation has nomic crises by adopting even greater eco- allowed politicians to deceitfully pose as nomic interventions. The late-nineteenth- “populists” while stifling competition with century proponents of antitrust had it all politically motivated attacks on the most backwards. This is why it is so disingenuous, innovative and progressive companies. These to say the least, of contemporary proponents attacks have been supported for over a centu- of antitrust, such as the Wall Street Journal’s ry by socialist intellectuals and journalists Murray, to repeat this same discredited argu- who have taught many Americans to hate cap- ment, urging Bill Gates to “place trust in italism, to envy successful people, and to sup- trustbusters,” or else “he may eventually find port government policies that undermine or the Justice Department and Congress consid- destroy them both. Being the most successful ering more-radical remedies.”!! businessman in the world, Bill Gates was an inevitable target of the anti-capitalistic cru- rs. It’s tim titrust for The Real Robber Barons saders. Its time we recognizid ants fo the protectionist racket that it is and repealed John D. Rockefeller, like Bill Gates, the antitrust laws. Ol achieved his economic success by offering the best products for the lowest prices on the free I. The following information about Standard Oil is from market. The real “robber barons” of the late Dominick Armentano, Antitrust and Monopoly: Anatomy of a Poli- } i . cy Failure (New York: Wiley, 1982). nineteenth and the late twentieth centuries are 2. Ida Tarbell, The History of the Standard Oil Company (New : : : York: Peter Smith, 1950), pp. 240-41. the business people who, having failed to 3. John S. McGee, “Predatory Price Cutting: The Standard Oil achieve competitive success in the market- (NJ) Case,” Journal of Law and Economics, October 1958, : p- 168. place turned to government and asked it to 4, Thomas J. DiLorenzo, “The Origins of Antitrust: An Interest- enact laws and regulations granting them spe- Group Perspective,” International Review of Law and Economics, : - armi . : 1985, pp. 73-90. cial privileges and h i Ing their competitors. 5. Congressional Record, 51st Congress, 1st Session, House, A century ago, such immoral special pleaders June 20, 1890, p. 4100. included Leland Stanford, who became o Toics P poss. wealthy by using his political connections to 8. New York Times, October 1, 1890, p. 2. : rnment- _ 9. Thomas J. DiLorenzo and Jack C. High, “Antitrust and Com- obtain a gove ent created monop oly fran petition, Historically Considered,” Economic Inquiry, July 1988, pp. chise in the California railroad industry; 423-34. : 10. Sanford D. Gordon, “Attitudes Toward Trusts Prior to the Thomas Durant and Grenville Dodge, who Sherman Act,” Southern Economic Journal, 1963, p. 158. pocketed millions in government subsidies to 11. Alan Murray, “It’s Time Gates Placed Trust in Trustbusters,” : : : : . 11 Wall Street Journal, March 9, 1998, p. 1. build the Union Pacific railroad; Henry Vil 12. Burton W. Folsom, Jr., The Myth of the Robber Barons lard, who “rushed into the wilderness to col- (Hemdon, Va.: Young America’s Foundation, 1991). ===== PAGE 18 ===== Anything That's Peaceful Economics: A Branch of Moral Philosophy by Leonard E. Read he author of The Wealth of Nations contrary, I believe that capitalism, in its sig- (1776) is frequently classed as an eigh- nificant sense, is more than Snyder and many teenth-century economist. But Adam Smith other statisticians and economists make it out was primarily a professor of moral philoso- to be—far more. If so, then to teach that cap- phy, the discipline which I believe is the italism is fully explained in mathematical appropriate one for the study of human action terms is to settle for something less than it and such subdivisions of it as may be involved really is. This leaves unexplained and vulner- in political economy. able the real case for capitalism. Moral philosophy is the study of right and Snyder equates capitalism with “capital wrong, good and evil, better and worse. These savings.” He explains what he means in his polarities cannot be translated into quantita- preface: tive and measurable terms and, for that rea- son, moral philosophy is sometimes discredit- The thesis here presented is simple, and ed as lacking scientific objectivity. And it is unequivocal; in its general outline, not not, in fact, a science in the sense that mathe- new. What 1s new, I would fain believe, is matics, chemistry, and physics are sciences. the proof; clear, statistical, and factual evi- The effort of many economists to make the dence. That thesis is that there is one way, study of political economy a natural science and only one way, that any people, in all draws the subject out of its broader discipline history, have ever risen from barbarism and of moral philosophy, which leads in turn to poverty to affluence and culture; and that is social mischief. by that concentrated and highly organized Carl Snyder, long-time statistician of the system of production and exchange which Federal Reserve Board, exemplifies an eco- we call Capitalistic: one way, and one nomic “scientist” He wrote an impressive alone. Further, that it is solely by the accu- book, Capitalism the Creator. mulation (and concentration) of this Capi- I agree with this author that capitalism is, tal, and directly proportional to the amount indeed, a creator, providing untold wealth and of this accumulation, that the modern material benefits to countless millions of peo- industrial nations have arisen: perhaps the ple. But, in spite of all the learned views to the sole way throughout the whole of eight or ten thousand years of economic history. Leonard E. Read established FEE in 1946 and served No argument—none whatsoever—as to as its president until his death in 1983. This article, h lishments of tal that it reprinted from the January 1972 issue of The Free- the accomplishments of capitalism, or that 1 man, is the sixth in a monthly series commemorating has to do with “capital savings.” But what is the 100th anniversary of Mr. Read’s birth. capital? 338 ===== PAGE 19 ===== 339 The Ideas Behind Capital It was inevitable, perhaps, that anything oo like a ‘social science’ should be the last to The first answer that comes to mind is that develop. Its bases are so largely statistical capital means the tools of production: brick that it was only with the development of an and mortar in the form of plants, electric and enormous body of new knowledge that water and other kinds of power, machines of anything resembling a firmly grounded and all kinds (including computers and other auto- truly scientific system could be established. mated things), ships at sea and trains and It is coming; already the most fundamental trucks and planes—you name it! These things elements of this knowledge are now avail- are indeed capital, but is capital in the sense able, as the pages to follow will endeavor of material wealth sufficient to tell the whole to sot forth. (Italics added) story of capitalism and its creative accom- plishments or potentialities? Snyder is, indeed, statistical. He displays 44 Merely bear in mind that all of this fantas- po Nearly all of these show the ups and tic gadgetry on which rests a high standard of 3oung mostly ups—of physical assets in living has its origin in ideas, inventions, dis- jo]lar terms. This. in his view is a “truly sci- coveries, insights, intuition, think-of-thats, oq. system.” But how scientific can a mea- and such other unmeasurable qualities as the erent be if the units cannot be quantified will to improve, the entrepreneurial spirit, nq the measuring rod is as imprecise in value intelligent self-interest, honesty, respect for cis the dollar or any other monetary unit? the rights of others, and the like. These are And what is truly scientific about showing spiritual as distinguished from material or he orowth in coal production, for instance, if physical assets, and always the former pre- (hore pe a shift in demand favoring some cedes and is responsible for the latter. This iS ther fuel? This would be only a pseudo- capital in its fundamental, originating sense; measurement with no more scientific rele- this accumulated wisdom of the ages—an nce than a century-old chart showing the overall luminosity—is the basic aspect of 4ojiar growth in buggy whip production. capital savings. CL Professor FA. Hayek enlightens us: “‘All Itis possible to become aware of this spiri- 0 physical laws of production’ which we tual capital, but not to measure, let alone t0 eet eo in economics, are not physical laws fully understand it—so enormous is its acCu- jj, the sense of the physical sciences but peo- mulation over the ages. Awareness? Sit in a jet ple’s beliefs about what they can do. . . . That plane and ask what part you had in its making. e ghjects of economic activity cannot be Very little, if any, even though you might be gefined in objective terms but only with refer- on the production line at Boeing. At most, you oe to 2a human purpose goes without saying. pressed a button that turned on forces about Neither a commodity’ or an ‘economic which you know next to nothing. Why, no good,’ nor ‘foods’ or ‘money,’ can be defined man even knows how to make the pencil you j; physical terms but only in terms of views used to sign a requisition. These “capital sav- people hold about things.” ings” put at your disposal an energy perhaps several hundred times your own. This accu- . . mulated energy—the workings of human National Accounting minds over the ages—is capital! Economic growth for a nation cannot be mathematically or statistically measured. Efforts to do so are highly misleading. They lead people to believe that a mere increase in With this concept of capital in mind, reflect the measured output of goods and services is, on how unrealistic are the ambitions of the in and of itself, economic growth. This falla- “scientific” economists. Carl Snyder phrases cy has led to the forced savings programs of their intentions well in the concluding para- centrally administered economic systems— graph of his preface: programs which decrease the range of volun- “Truly Scientific” ===== PAGE 20 ===== 340 THE FREEMAN ee JUNE 1998 When we grasp the point that no man who ever lived has been able to foresee his own future choices, let alone those of others, economic scientism, as it might be called, makes no sense. tary choice among individuals. This is the be understood—*“a dismal science,” for cer- heart of the failure of the socialistic policies tain. Indeed, could the ambitions of the “sci- of the underdeveloped nations of Asia, Africa, entific economists” be realized, dictatorship and Latin America. As Professor PT. Bauer would be a viable political system. At the dic- has written so eloquently: “I regard the exten- tator’s disposal would be all the formulae, all sion of the range of choice, that is, an increase the answers; disregarding personal views and in the range of effective alternatives open to choices, he would simply run his information people, as the principal objective and criteri- through computers and thus meet production on of economic development; and I judge a schedules. measure principally by its probable effects on When we grasp the point that no man who the range of alternatives open to individuals.” ever lived has been able to foresee his own Indeed, even an individual’s economic future choices, let alone those of others, eco- growth can no more be measured, exclusively, nomic scientism, as it might be called, makes in terms of historical statistics than can his no sense. intellectual, moral, and spiritual growth. These ups and downs cannot be defined in physical terms but only in terms of views people hold about things. These views—high- How did we ever get off on this untenable ly personal—are in constant flux; you may course? Perhaps we can only speculate. A fla- care nothing tomorrow for that which you grant display: At one point in a recent seminar highly prize today. discussion I repeated, “Only God can make a Once we grasp the point that the value of tree.” And then this exclamation by a graduate any good or service is whatever others will student, “Up until now!” This, it appears to give in willing exchange, and that the judg- me, is the reflection of a notion, so prevalent ments of all parties to all exchanges are con- in the eighteenth and nineteenth centuries, stantly and forever changing, it should be that every facet of Creation, even life itself, plain that even physical assets—money, food, lies within the powers of man. Merely a mat- or whatever—do not lend themselves to mea- ter of time! surements in the scientific sense. To tear human action asunder and then And when we further reflect on the funda- to assign symbols or labels to the pieces, mental nature of “capital savings”—that they as the scientists properly do with the chemi- emerge out of ideas, inventions, insights, and cal elements, is no service to economic the like—the idea of scientific measurement understanding. This method makes under- becomes patently absurd. standing impossible for the simple reason In any event, it is this penchant to make a that it presupposes numerous phases of science of political economy, to reduce capi- human action that can be mathematically or talistic behavior to charts, statistics, theorems, scientifically distinguished one from the other arbitrary symbols, that leads to such nonsense when such is not the case. Why am I motivat- as the Gross National Product (GNP), ed to write this or you to read it? Doubtless, “national goals,” and “social gains.’ The each of us can render a judgment of sorts but more pronounced this trend, the less will the it will not be, cannot be, in the language of economics of capitalism and the free society science. Man’s Arrogance ===== PAGE 21 ===== ECONOMICS: A BRANCH OF MORAL PHILOSOPHY 341 Political economy is as easy or, perhaps, as How dependent is overcoming scarcity on difficult to understand and practice as the honesty, respect of each for the rights of oth- Golden Rule or the Ten Commandments. Eco- ers, the entrepreneurial spirit, intelligent inter- nomics is no more than a study of how scarci- pretation of self-interest? ty is best overcome, and the first thing we Viewed in this manner, political economy need to realize is that this is accomplished by is not a natural science like chemistry or the continued application of human action to physics but, rather, a division of moral phi- natural resources. losophy—a study of what is right and what is Natural resources are what they are, no wrong in overcoming scarcity and maximiz- more, no less—the ultimate given! The vari- ing prosperity—the problem to which it able is human action. addresses itself. Political economy, then, resolves itself into Once we drop the “scientific” jargon and the study of what is and what is not intelligent begin to study political economy for what it human action. It should attempt to answer really is, then its mastery becomes no more such questions as: difficult than understanding that one should Is creative energy more efficiently released never do to others that which he would not among free or coerced men? have them do unto him. OJ Is freedom to choose as much a right of one 9) as another’ . . 1. Carl Snyder, Capitalism the Creator (New York: The Macmil- Who has the right to the fruits of labor—the ian Company, 1940; Amo Press, 1972). 2 2. See F.A. Hayek, The Counter-Revolution of Science (New producer or nonp roducer? } .. York: The Free Press of Glencoe, The Crowell-Collier Publishing How is value determined—by political co. 1964), p. 31. : : _ 3. P.T. Bauer, Economic Analysis and Policy in Underdeveloped authority, cost of production, or by what oth Countries (Durham, N.C.: Duke University Press, 1957), p. 113. ers will give 1n willing exchange? 4. For more on the GNP fallacy and how economic growth can- What actions of men should be restrained— not be “factually” reported, see “A Measure of Growth” in my Deep- . . . . er Than You Think (Irvington-on-Hudson, N.Y.: The Foundation for creative actions or only destructive actions? Economic Education, Inc., 1967), pp. 70-84. ANYTHING THAT'S PEACEFUL The Case for the Free Market by Leonard E. Read Anything That's Peaceful, written in 1964 and often hailed as Leonard Read’s best book, is the fruit of years of experience in lecturing and writing on the free market and related institutions. “By my title, “Anything Thats Peaceful,”” Mr. Read explains, “I mean let anyone do anything he pleases that’s peaceful or creative; let there be no organized restraint against anything but fraud, violence, misrepresentation, predation; let anyone deliver mail or educate or preach his religion or whatever, so long as it’s peaceful.” Intriguing chapter titles, such as “Only God Can Make a Tree—or a Pencil,” “The Most Important Discovery in Economics,” and “The Greatest Computer on Earth,” invite the reader to accompany Leonard Read on his exploration of the wonders of freedom. See reply envelope. ~~ 253 pages, indexed, paperback $5.95 ===== PAGE 22 ===== Potomac Principles by Doug Bandow Institutional Immortality, Washington Style on’t count on your budget surplus before for decades. The Economic Development the check clears.” That should be this Administration treats most of the country as year’s motto for taxpayers. Politicians are depressed and robs taxpayers in one state to already debating how to spend the extra underwrite citizens in another. The Agency money they expect to collect. President Bill for International Development takes money Clinton has a $150 billion wish list, and many from poor people in rich countries and trans- Republicans are almost as bad. Unfortunately, fers it to rich people in poor countries, subsi- if last year’s budget deal was any example, dizing autocracy and collectivism along the taxpayers are unlikely to benefit from the pre- way. The Corporation for National Service dicted budget cornucopia. pays people to volunteer. All these survive, The failings of that supposedly historic many with increased funding. agreement were many. Federal domestic Lack of purpose is no bar to a big bureau- spending continues to rise even though, cracy and generous budget. Two decades ago adjusted for inflation, it had already risenby a the United States suffered an “energy crisis.” third over the previous decade (nearly four [t was in fact, a problem of bad policy, not times as fast as family income). Three-fourths inadequate oil. Richard Nixon limited oil of the supposed savings is slated to occur in prices as part of his wage and price controls, the year 2001 or beyond, two Congresses away. and preserved the energy restrictions after he Moreover, supposedly economy-minded GOP ¢pdeq the rest of the program. The result was legislators failed to corral any of Washing- coq demand, decreased supply, and, ton’s most notorious sacred cows. paradoxically, higher imports, since firms The Appalachian Regional Commission, a ith greater domestic reserves had to send Great Society program devoted to bringing checks to those that imported higher-priced economic growth to Appalachia, still chugs forei0n petroleum. (As humor columnist along, no closer to its supposed goal. The Dave Barry says, I'm not making this up—the Rural Housing Development Service has been government forced domestic producers to providing home loans to farm areas since the subsidize oil importers.) Great Depression. The Agriculture Depart- The 1973 OPEC oil embargo caused prob- ment continues to pay farmers to grow, and jog but far more destructive were the activ- not to grow, crops. With the help of federal joc of the Carter administration, which creat- subsidies, the Tennessee Valley Authority has ed a genuine crisis with a “windfall profits” been providing cheap power to local residents tax, gasoline-allocation rules, temperature —_— : .__. controls in “public” buildings, draconian Doug Bandow, a nationally syndicated columnist, is . tal trictions. the $88 billi a senior fellow at the Cato Institute and the author environmental restrictions, ton and editor of several books, including Tripwire: Synthetic Fuels Corporation, and limits on Korea and U.S. Foreign Policy in a Changed World. leasing of the Outer Continental Shelf and 342 ===== PAGE 23 ===== 343 federal lands. So Congress created the difference between a list of untrained 18-to- Department of Energy, which not only man- 25-year-olds and a sophisticated active-duty aged all of the dumb old programs that force. Moreover, the world in which registra- weren’t working, but embarked on a host of tion was created has disappeared: the cold war dumb new ones—efficiency standards for has ended, the Soviet Union has collapsed, refrigerators and toilets, research for high- and Poland is now a Western-leaning democ- cost renewable energy, and the like. racy set to join NATO. Still, registration and Selective Service live on. The President touts the importance of maintaining “the link between the All- President Ronald Reagan decontrolled the Volunteer Force and our society at large,” as price of oil in 1981 but did little to kill the if filling out a card at the Post Office gener- department. Now energy supplies are abun- ates patriotism. Clinton also fusses about dant, and the Republican Congress last year sending “the wrong signal to our potential .. voted $15.9 billion for the department, a enemies,” though the latter are few and $100 million increase. Real budget cutters pathetic, and would be subdued by the active would instead go on a turkey shoot, killing force before the first conscript emerged from research expenditures that underwrite busi- basic training. ness, regulatory programs that micromanage Finally, the agency is pushing a “Service to consumer choices, and Power Marketing America” initiative. That is, explains Director Administrations, which subsidize favored Gil Coronado, “in our routine communication electricity consumers. with all new registrants in America, we At least the Department of Energy is only encourage them to serve America today,” 20 years old. President Franklin Roosevelt including “community service through the established the Rural Electrification Adminis- Corporation for National Service.” Half of the tration in 1935 to bring power to rural Ameri- administration’s proposed increase for 1998 ca. Once the agency got going, it, like the was to fund this program, which solicits Energizer Bunny, never stopped. Virtually support for another agency that shouldn’t every home now has electricity, but the pro- exist. Agency materials speak of “shifting gram—recently renamed the Rural Utility gears” and spokesman Lewis Brodsky admits Service—continues to provide cheap credit to that Selective Service “can no longer dwell some one thousand cooperatives across upon its proud past or bet on the threats of America. Many of the communities being tomorrow. The system must be of proven subsidized, like Hilton Head Island and value to America foday and every day.” Snowmass, qualify as needy under no one’s Thus, the agency is dedicated to simultane- definition. Except someone living in Wash- ously preventing nuclear war and spreading ington. voluntarism. In 1996 the GOP Congress appropriated When the GOP gained control of Congress $2.7 billion for the RUS. Last year the Repub- in 1994, it targeted some 300 programs. Only licans approved a $300 million increase, a handful have ended. The rest wastefully including an extra $125 million in loans for carry on. There are 342 federal programs distance learning and telemedicine, programs devoted to economic development, 163 for with nothing to do with the agency’s original job-training, and 131 involving juveniles. purpose. Most don’t work, but they persist nonetheless. Cheaper, at $24 million a year, but no less Complains budget analyst Stephen Moore, illustrative, is the Selective Service System. “as in the Reagan years, Republicans have In response to the Soviet invasion of quickly retreated from the agenda of making Afghanistan, President Carter imposed draft government in Washington smaller and registration and revived Selective Service. It smarter.” Which is why taxpayers shouldn’t failed in its purpose of impressing the expect to ever see their share of the federal U.S.S.R.—Soviet leaders could always tell the budget surplus. 0 The Department Lives ===== PAGE 24 ===== (DEAS ON UBERTY Natural Society Revisited by Juliana Geran Pilon t is heartening that a fashionable new field with some of the most pressing problems of known as “civil society studies” has recent- our time. The question of how to invigorate a ly emerged. It is surely a symptom of concern healthy civil society is thus preoccupying over whether modern society as we know itis pundits and scholars, though not always with sufficiently civil to foster the growth of West- felicitous results. ern liberalism. But however distinct the prob- The ambiguity that surrounds the topic of lems of modernity may be, and they surely “civil society,” as Hall correctly points out, is are, revisiting the original texts of the Enlight- due to the fact that the concept is “at one and enment that first established the field by defin- the same time a social value and a set of social ing “civil society” seems particularly salutary. institutions.”2 The temptation to address both Credit for this renewed interest dating back at once, to judge the social value of a particu- more than two decades must go to those who lar type of civil society while defining the set most felt its absence. Notes sociologist John of social institutions that make it up, renders A. Hall, “civil society was placed at the fore- an objective evaluation almost impossible. front of public attention by attempts to estab- Hall is correct to attempt to differentiate the lish decency in societies where it had most two. He offers the following definition: “Civil conspicuously been absent,”! particularly by society is a particular form of society, appre- Solidarity in Poland. The term emerged how- ciating social diversity and able to limit the ever mainly in a nebulous negative sense, as depredations of political power, that was born “the opposite of despotism.” The lack of a jn Europe; it may, with some luck, skill and clear definition is only one reason for the jmagination, spread to some other regions of floundering that has characterized efforts to the world.” create a genuine civil society in the post- But even this definition does not seem fully Soviet era. capable of shedding normative connotations, The nineties have seen a similar resurgence for “social diversity” is evidently presented of interest in the idea of civil society in the 35 a value worth “appreciating” while “the United States, for reasons that are in some depredation of political power” has clearly ways similar to what inspired Solidarity: a pejorative connotations. Hall admits to being sense that government is quite powerful and at enthusiastically in favor of civil society, to the the same time palpably ill equipped to deal point that he “would gladly embrace social tendencies sure to establish civil society even Juliana Pilon is director of programs for Europe and h thi A s would diminish any conception of Asia at the International Foundation for Election though thi d any p : Lang Systems and the author of The Bloody Flag: Post- social agency and human responsibility. Communist Nationalism in East-Central Europe— Unfortunately, this leaves the reader to won- Spotlight on Romania. der just how those “social tendencies” could 344 ===== PAGE 25 ===== 345 be, how they are to be “fostered,” and good was originally never perceived to be a whether, if indeed they emerge at the expense conflict at all. of “human responsibility,” in what way a soci- Ferguson firmly believed in man’s ability— ety where such “tendencies” are exhibited can and right—to conduct his affairs as he sees fit. still be deemed “civil.” And unlike some of his more misanthropic The main point, however, is that Hall contemporaries—particularly Edmund Burke, requires “civil” society to include an “appreci- in his brilliant Vindication of Natural Society, ation” of pluralism. This is not true of all def- published in 1756—Ferguson trusts at least initions. As Adam Seligman notes in his pop- some of man’s passions, notably “benevo- ular book The Idea of Civil Society, written lence,” which he defines as “no more than a immediately after the fall of the Iron Curtain species of self-love.”® Far from denying that in Hungary and published in 1992, the concept animosity and narrow self-interest are among of civil society “has come to mean different man’s less honorable passions, Ferguson nev- things to different people.” Yet he observes ertheless finds that man is happiest in the that the concept “embodies for many an ethi- company of others, not only because he is cal ideal of the social order, one that, if not safer in a civil society but also because he overcomes, at least harmonizes, the conflict- finds the presence of others rewarding. Thus ing demands of individual interest and social “if courage be the gift of society to man, we good.”s The concept, in other words, seems to have reason to consider his union with his imply that society, to qualify as “civil,” should species as the noblest part of his fortune.” seek “the social good” while permitting Interestingly, the term “civil society” as (“appreciating”?) the need for some “diversi- such appears only once in Ferguson’s long ty,” some notion of “individual interest.” essay. But that one definition is sufficient to indicate that Ferguson’s conception is directly Squaring the Circle counter to Seligman’s contention that “civil society” seeks to reconcile necessarily oppo- Not wishing to appear libertarian in any site concepts, namely individual interests and way, Seligman is quick to point out that “the the goals of society. Writes Ferguson: “The problem of liberal-individualist ideology . . . happiness of individuals is the great end of is, how to constitute a sense of community civil society: for in what sense can a public among and between social actors who are enjoy any good, if its members, considered conceived of in terms of autonomous individ- apart, be unhappy?”’!? Society is the sum of its uals.”’¢ In brief, “civil society” seems to require members; a “sum” of their happiness there- an internal squaring of what appears to be a fore defines the good of all. vicious circle encompassing “autonomous” In brief, Ferguson’s original conception of individual interests and the (logically and the civil society defines its end as permitting empirically presumed opposite) social good the exercise of individual freedom, the pursuit and “a sense of community.” How that circle of individual goals that are perceived to be is supposed to be squared while preserving good to those who pursue them. At the same freedom seems to elude Seligman no less than time, Ferguson is convinced that men are—or Hall. at least can be—mnaturally benevolent, and It is time therefore to take more seriously believes the feeling of benevolence can be the separation between the normative and the nurtured by underscoring its rational and descriptive elements of the term, while at the emotional basis. Not only did Ferguson not same time resurrecting the elegant discussion see a contradiction between individual and of the original idea as presented in the eigh- social ends; he saw such a contradiction to be teenth century, notably by Adam Ferguson in meaningless. Any “public interest” that is his still eminently readable Essay on the His- opposed to the interests of members of that tory of Civil Society, published in 1767.7 It is public cannot possibly be any good. important to note that the alleged conflict Ferguson has thus defined the civil society between individual interests and the social as the “total” of the goals pursued by individ- ===== PAGE 26 ===== 346 THE FREEMAN e JUNE 1998 uals seeking their own happiness (and one Ferguson’s definition of “civil society” as may add, in full conformity with the spirit of the “total” of individual goals pursued in an his lengthy essay, at the same time respecting atmosphere of mutual respect necessarily everyone else’s right to do the same). What is implies “an appreciation of social diversity.” more, these goals are pursued outside the It repudiates however the supposed tension political realm, or as Burke might have put it, between individual interests and the social in “Natural Society.” good. That tension should not exist in a soci- ety that nurtures benevolence in a manner that Benevolence as a Form of is consistent with the principle of human responsibility. And in any event, a society that Self-Love dispenses with responsibility cannot be called The normative element that Ferguson clear- Civil” in either a descriptive or normative ly adds to this descriptive definition is that a S€NS€ of the term. society which makes possible the pursuit of Civil society is certainly not guaranteed individual goals will also be a desirable, truly bY freedom. Freedom requires stable insti- “civil” society (in the honorific sense of the tutions and the rule of law. Without free- term) if its members are benevolent. Benevo- dom, however, society can be called “civil” lence is the great virtue that makes human Only at the expense of both semantic hon- beings take pleasure in one another’s company, ©Sty and the nature of human action. Commu- desire one another's happiness, and seek to nity and benevolence should not be seen as help others in distress. Benevolence is an emi- antithetical to the pursuit of individual inter- nently rational feeling, entirely consistent with StS; it was not perceived that way by the self-interest, indeed is a species of self-love. Philosophers who first conceptualized “civil Accordingly, a civil society where benevo- society.” lence is nurtured and ubiquitous is eminently ~~ Adam Ferguson defended the proposition desirable and entirely possible. It is absurd to that the interests of the individual and those of think that man could ever be forced to be Society are “easily reconciled” with the fol- either rational or good. To be good, man has lowing observation: “That is the most happy to be free. Anything else is meaningless—or State, which is most beloved by its subjects; at least does not constitute a genuinely civil and they are the most happy men, whose society. hearts are engaged to a community, in which This brings us to the main difference they find every object of generosity and zeal, between the discussion of civil society at the anda scope to the exercise of every talent, and time of the Enlightenment and today. There Of every virtuous disposition.”!! That commu- appears to be strong distrust, not only in for- MIty will not happen by force. It should not merly communist countries but also in the have taken the terrible reality of communism West, of purely private initiative, of individual to prove that simple fact. u freedom, lest it undermine the sense of “com- munity” and “the social good.” There seems (Cambridge, Englan py Dat gay oy Histor Comparison to be a prevailing fear that people will not 2. Ibid, p. 3. behave benevolently unless somehow pres- J Id: P 2. sured or even forced to do so. Yet forcing peo- 5. Adam Seligman, The Idea of Civil Society (New York: The ple to pursue “the common good” rather than Frog Press 208 p-x. respecting each person’s right to pursue his 7. Adam Ferguson, 4n Essay on the History of Civil Society (New : . : Brunswick, N.J.: Transaction Publishers, 1991). own happiness as he sees fit (while respecting 8. Ibid. p. 14. See Edmund Burke, 4 Vindication of Natural Soci- everyone else’s right to do the same) can only es (Indianapolis: Liberty Classics, 1982). . . ir : 9. Ferguson, p. 19. result in a society that may seem civil but is 10. Ibid., p. 58. only dubiously free. 11. Ibid. ===== PAGE 27 ===== THE IDEAS ON LIBERTY — The Origin of Religious Tolerance by Wendy McElroy I 1733 the philosopher credited with usher- almost destroyed itself in order to establish ing in the French Enlightenment, Frangois Catholicism as the only practiced religion. Marie Arouet de Voltaire, published Letters In the next paragraph, Voltaire pursued a Concerning the English Nation. It was a piv- theme that contributed heavily to the danger otal work. Although written in French, the 24 of publishing his work in France: he examined letters were first issued from London in an the intellectual and institutional foundation of English translation; the material was consid- England’s religious tolerance. First, he reject- ered too politically dangerous for the author ed a political explanation. Referring to the or any French printer to have the work to established Church of England, he acknowl- appear in France.! edged that politics strongly favored prejudice Voltaire was no stranger to such controver- rather than tolerance. He wrote, “No one can sy. Some years before, after being beaten up hold office in England or in Ireland unless he by the hirelings of an aristocrat whom he had is a faithful Anglican”? Such political exclu- offended, Voltaire had been thrown into the sion hardly promoted religious good will. Bastille (for the second time). He was Nor did the religious preaching of the dom- released after pledging to stay at least S50 inant church lead the nation toward toleration. leagues away from Paris. Voltaire chose to go According to Voltaire, the Anglican clergy as far as England, where he stayed for rough- worked “up in their flocks as much holy zeal ly two-and-a-half years. The result of the against nonconformists as possible.” Yet in sojourn was the Letters on English religion recent decades, the “fury of the sects . . . went and politics, written as though to explain Eng- no further than sometimes breaking the win- lish society to a friend back in France. They dows of heretical chapels.” finally appeared in France in 1734 as Lettres What, then, accounted for the extreme reli- philosophiques, or Philosophical Letters. gious toleration in the streets of London as Letter five, “On the Church of England,” compared to those of Paris? began with the observation, “This is the coun- try of sects. An Englishman, as a freeman, goes to Heaven by whatever road he pleases.” The statement had profound implications for In letter six, “On the Presbyterians,” any citizen of France—a nation that had Voltaire ascribed the “peace” in which “they [Englishmen] lived happily together” to a [a — mechanism that was a pure expression of the Wendy McElroy. afr oF The contributor "0 ne Free free market—the London Stock Exchange. In Guide to Intellectual Survival (Prometheus Books, the most famous passage from Philosophical 1998). Letters, Voltaire observed, “Go into the 347 The Peace of Commerce ===== PAGE 28 ===== 348 THE FREEMAN e JUNE 1998 loyed contempt. In letter 10, “On Commerce,” Voltaire pointedly commented on the French attitude: “The merchant himself so often hears his profession spoken of disdainfully that he is fool enough to blush.” Yet in Eng- land, the “merchant justly proud” compares himself “not without some reason, to a Roman citizen.” Indeed, the younger sons of nobility often entered commerce or took up a profession. This difference in attitude was a large factor in explaining the extraordinary rise of the English middle class, their wealth deriving from trade. Indeed, the French often derided England as a nation of shopkeepers. Voltaire thought this was a compliment, observing that if the English were able to sell themselves, it proved that they were worth something. Exchange in London, that place more venera- Commerce, or shopkeeping, established an ble than many a court, and you will see repre- arena within which people dealt with each sentatives of all the nations assembled there other solely for economic benefit and, so, for the profit of mankind. There the Jew, the ignored extraneous factors such as the other Mahometan, and the Christian deal with one party’s religious practices. On the floor of the another as if they were of the same religion, London Stock Exchange, religious differ- and reserve the name of infidel for those who ences disappeared into background noise as go bankrupt.” people scrambled to make a profit from one Legally and historically, England was no another. The economic self-interest of the bastion of religious toleration: laws against Christian and the Jew outweighed the preju- nonconformists and atheists were still in dice that might otherwise sour personal rela- force. Yet in England, and not in France, there tions between them. They intersected and was an air of toleration on the street that exist- cooperated on a point of common interest: ed quite apart from the law. Even though both “the Presbyterian trusts the Anabaptist, and countries had aristocracies, England was not the Church of England man accepts the burdened with the unyielding class structure promise of the Quaker,” Voltaire wrote in “On that crippled social and economic mobility in the Presbyterians.” France. As Voltaire wrote in letter nine, “On the Government”: “You hear no talk in this country [England] of high, middle, and low Voltaire Versus Marx justice, nor of the right of hunting over the Ironically, Voltaire singled out for praise property of a citizen who himself has not the precisely the same aspect of commerce—the liberty of firing a shot in his own field.” London Stock Exchange—that Karl Marx A key to the difference between England later condemned. Both viewed the market- and France lay in the English system of com- place as impersonal or, in more negative merce and in the comparatively high regard in Marxist terms, dehumanizing. For Marx, peo- which the English held their merchants. (This ple in the marketplace ceased to be individu- is not meant to slight the substantial differ- als expressing their humanity and became ences between the English and French gov- interchangeable units who bought and sold. ernments—especially the constitutional To Voltaire, the impersonal nature of trade ones—upon which Voltaire dwelled.) In was a good thing. It allowed people to disre- France, aristocrats and the other elites of soci- gard the divisive human factors that had his- ety regarded those in commerce with unal- torically disrupted society, such as differences ===== PAGE 29 ===== THE ORIGIN OF RELIGIOUS TOLERANCE 349 _- ——— — —— e— — er— — — — — — are—— — “If there were only one religion in England, there would be danger of tyranny; if there were two, they would cut each other’s throats; but there are thirty, and they live happily together in peace.” —VOLTAIRE “On the Presbyterians” of religion and class. The very fact that a letters that they played a large part in the Christian who wished to profit from a Jew, awakening of his mind; there must have been and vice versa, had to disregard the personal thousands of young Frenchmen who owed the characteristics of the other party and deal with book a similar debt. Lafayette said it made him civilly was what recommended the Lon- him a republican at the age of nine. [Heinrich] don Stock Exchange to Voltaire. Heine thought ‘it was not necessary for the In this, Voltaire’s voice is reminiscent of censor to condemn this book; it would have Adam Smith in his most popular work, The been read without that.’”’3 Wealth of Nations. Smith outlined how every- one in a civilized market society is dependent The French Reaction on the cooperation of multitudes even though his friends may number no more than a dozen Nevertheless, French censors seemed or so. A marketplace requires the participa- eager to condemn it. The printer was impris- tion of throngs of people, most of whom one oned in the Bastille. A lettre de cachet for the never directly encounters. It would be folly elusive Voltaire’s immediate arrest was for any man to expect multitudes of strangers issued. By a legislative order, all known to benefit him out of sheer benevolence or copies of the work were confiscated and because they like him. The cooperation of the burned in front of the Palais de Justice. butcher or the brewer, said Smith, was Through the intercession of powerful friends, ensured by their simple self-interest. Thus, the lettre de cachet was withdrawn, again on those who entered the marketplace did not the promise that he remain safely outside the need the approval or favor of those with limits of Paris. In this manner did the French whom they dealt. They needed only to pay church and state respond to Voltaire’s salute their bills. to toleration. The toleration created by the London Stock But the themes of the Philosophical Let- Exchange extended far beyond its doors. ters resounded deeply within the conscious- After conducting business with each other, ness of Europe for many decades to come. the Christian and the Jew went their separate One of its themes was that freedom—espe- ways. As Voltaire phrased it, “On leaving cially freedom of commerce—was the true these peaceable and free assemblies, some go wellspring of religious toleration and of a to the synagogue, others in search of a drink. peaceful civil society. The insight was noth- .. In the end, “all are satisfied.” ing short of revolutionary because it reversed The Philosophical Letters—Voltaire’s trib- the accepted argument and policies on how to ute to the English middle class, their com- create a harmonious society. Traditionally, merce, and their society—created an enor- France (along with most other European mous impact on the European intellectual nations) attempted to enforce a homogeneous scene. Calling the work “a declaration of war system of values on its people in the belief and a map of campaign,” Will and Ariel that common values were necessary to ensure Durant commented: “Rousseau said of these peace and harmony, the social glue that held ===== PAGE 30 ===== 350 THE FREEMAN e JUNE 1998 together the social fabric. This was thought to Perhaps one reason that Voltaire’s Philo- be particularly true of religious values. sophical Letters created such a backlash from This was not a moral argument, but a prac- the French leviathan was that the book’s logic, tical one: society would collapse into open if carried beyond religion, would strike at any violence without the cohesion provided by government attempt to impose common val- common values. Thus, those in authority ues or practices on the people. Indeed, needed to centrally plan and rigorously Voltaire’s argument against homogeneity con- enforce the values that should be taught to and tinues to have deep implications for the cen- should be practiced by the masses. After all, if tralized policies of all governments. Those people were allowed to choose their own reli- citizens who reject imposed homogeneity in gious values, if values became a commodity religion might well be prompted to question open to competition, then civil chaos and con- the wisdom of many other government insti- flict would inevitably ensue. tutions, including public schools, which are Voltaire argued that precisely the opposite often justified by the declared need for com- was true. The process of imposing homoge- mon values. The freedom of individuals to neous values led only to conflict and religious decide matters of value for themselves could wars. The result was a society intellectually easily prompt them to demand the right to live stagnant and morally corrupt, because doubt according to those values and to teach them to or dissent was suppressed. It was diversity their children. Thus could the system of cen- and freedom that created a thriving and peace- tralized control unravel. J ful society. Voltaire ended his most-quoted “If there were only one religion in England, ters, trans. Emest Dilworth (New York: Macmillan Publishing Com- there would be danger of tyranny; if there Pe I Ses rod barriers for non-Anglicans was the Test were two, they would cut each other’s throats; Act of 1673, which required the holders of public office to receive but there are thirty, and they live happily the Sacrament in the Church of England. vs 3. Will and Ariel Durant in The Story of Civilization: Part IX, The together 1n peace. Age of Voltaire (New York: Simon and Schuster, 1965), p. 370. WANTED: Entrepreneurs For the Marketplace Of Ideas The Freeman Society Discussion Clubs are looking for energetic, dedicated people to begin new clubs. These groups seek to further the acceptance of the ideas The Freeman represents; dozens have been formed in the United States and abroad. Would you like to help spread the philosophy of freedom by starting (or joining) a discussion club? If so, contact George Leef, Director of Freeman Discussion Clubs, who will help you get started. Phone him at (517) 336-7631 —or send e-mail to: gleef@patrickhenry.com. Or contact FEE and your mes- sage will be forwarded. “All that is necessary for the triumph of evil is that good men do nothing.” —EDMUND BURKE ===== PAGE 31 ===== [DEAS ON LIBERTY A Peaceful Ferment in Somalia by Spencer Heath MacCallum Asoc! experiment with far-reaching many years, but had never expected that any- implications for human freedom is shap- one would ask the question. I said I thought it ing up in Somalia. I had known that some- was theoretically possible, but that it would thing was afoot but learned the details only take extraordinary patience, careful planning, last summer on meeting a Somali tibeswoman great flexibility. The way was untraveled. traveling in the United States with her Euro- As we talked, she explained an approach pean husband. She was an elegant, educated that Somalis from several tribes had dis- lady who would have been at home in any of cussed. It involves capitalizing on their state- the great cities of the world. When her hus- lessness by opening areas within their tribal band introduced me as an anthropologist with |ands for development, inviting businessmen classical liberal leanings, conversation turned and professionals the world over to come to toward her tribe, an independent, nomadic take advantage of the absence of a central people who control and move over a large government or other coercive authority. In area on both sides of the Somalo-Ethiopian this way Somalia’s statelessness might prove border. Hers is one of a constellation of tribes {5 pe uniquely valuable asset in the modern sharing similar language, culture, and cus- orld. tomary law that for countless centuries lived Specifically, they were considering offering together in relative harmony in that eastern- gitable tracts within their tribal lands on long- most jut of the continent known as the Horn ¢o11 jease for private development. Such of Africa. The Somali nation by tradition, she development would take the pattern of large said, is a stateless society; they have never multiple-tenant income properties— “estates,” accepted the authority of any central govern- 5 the British would call them—where the ment, their own or any other. land would be leased but the improvements Then she asked a question that took me by uid be privately owned. An attractive site surprise: “Do you think it possible that my ;4e; consideration by my friend’s tribe was a people could come into full participation in sparsely populated upland valley, which the modern world—culturally, scientifically, because of its elevation enjoyed a temperate economically —without becoming a part of jie vet also had access to the sea. any state ” I told her I'd thought about that An industrious population, the tribespeople possibility with respect to tribal peoples for reasoned, attracted from all quarters of the globe by the promise of unprecedented per- Spencer MacCallum is a social anthropologist living sonal and business freedom, could make such in Tonopah, Nevada, where he directs the Heather Foundation. He is the author of numerous articles on 3188 productive enterprise Zones. Some of classical liberalism and of The Art of Community, the more successful zones might eventually published by the Institute for Humane Studies. become bustling cities not unlike the free 351 ===== PAGE 32 ===== 352 THE FREEMAN e JUNE 1998 cities of medieval Europe that began the mod- and finally as a consultant with UNESCO. He ern age. Such an arrangement would yield the wrote that “donor countries and international tribes an income; their members would enjoy financial institutions . . . are uneasy with the a dignified status as the ultimate landlords; Somali experience which they perceive as and they would have available to them in their dangerously contagious. In fact, the Somali own backyard, as it were, an abundance and experience is rather confusing for the ordi- variety of educational, training, and work nary minds. Who could imagine that Somalia opportunities. It would be their steppingstone exports today five times more than in 1989, to full entry into the modern world. This was the last year of which official estimates are the dream that my friends shared with me on available.” a summer afternoon. He went on to state that the economy of Somalia “functions as a perfect model of ‘lais- The Chaos That Isn’t sez-faire’ as conceived by Adam Smith. Gov- ernment spending is reduced to zero and infla- Other Americans they had mentioned this tion is very low. The Somali shilling is freely to were horrified. All had a similar picture in convertible in the market and exchange rates mind. From media reports, they knew—or are more stable than in most African coun- thought they knew—contemporary Somalia tries.” He also said that “telecommunications to be in unrelenting chaos, ravaged by war- and air transport have made tremendous devel- fare, starvation, and disease, the battleground opment during the last seven years. . . . Indeed, of rival warlords such that people could nei- Somalia has no customs authorities and all ther put in their crops nor harvest them if goods are imported duty free. New schools they did. What else could one expect of a and clinics are opening every day, offering country that had been without a central gov- their services to those who can afford to pay.”? ernment for seven years? But my friends said In the absence of statistics, I wondered how this picture is sadly exaggerated. While there Mohamed Mohamed obtained his informa- is a modicum of fighting and disorder in tion that Somali exports had increased five- some areas, most notably in the south, the fold? In correspondence with me, he overall picture is far different. Many Somalis, explained how he had carried out field they said, are finding that the absence of a research, what assumptions he had made, and central government has its advantages. how he defended his conclusion. The approx- Having been influenced by the same media, imation sounded reasonable, however rough. I was skeptical. But the possibility that my More evidence was a lengthy report in the friends might be right was so intriguing that APC-EC Courier, published by the Commis- over the next few months I found myself look- sion of the European Communities, Brussels. ing for corroboration. It came from many The report notes that “The outside world’s pic- places. First, a Los Angeles Times article, ture of Somalia has been distorted by the natur- titled “A Somali Alternative to Chaos,” al tendency of the foreign media to focus on described the prosperity of the seaport of bad news.” It goes on to say that “In the absence Bosaasso in northeastern Somalia. Its open- of a central government, Somalia has fractured ing words were, “Near the tip of the Horn of into dozens of different fiefdoms with all man- Africa, a port city is booming, helped by a ner of competing and overlapping authorities.” lack of clan warfare and the absence of a cen- Yet, states the report, “Peace reigns in most of tral government.”! the country. Regional and local governments Next was a signed newspaper editorial in have been able to resume working in many Addis Ababa, Ethiopia, titled, “Does Somalia areas, albeit on a minimal basis.” Really Need a Government?” There could be The report continues that the markets in no doubt that the author, Mohamed Mohamed towns and cities had a large variety of imports Sheikh, was a qualified observer. Born in and that local entrepreneurs were furnishing Somalia, south of Bosaasso, he had worked in consumer products and jobs. “They now pro- Mogadishu as a radio reporter, then in the vide many services normally associated with information services of various ministries, government,” it says. “The lack of state struc- ===== PAGE 33 ===== The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail: freeman @fee.org June 1998 ® LJ LJ Foolish Inconsistencies hen a domestic steel producer Both beliefs can’t be true. If capitalists WV ssenaiy croons for the televi- care only about the bottom line, they will sion cameras about how high energetically pursue profitable deals with tariffs on imported steel are good for the | anyone regardless of skin color or sex. A American economy, you can be sure that | capitalist focused only on maximizing he is not really interested in the well- profits will not refuse to hire a black being of his fellow citizens. He is woman if this black woman promises to undoubtedly a swindler motivated by no | add greater net value to the firm than ideal more elevated than fattening his does a white man competing for the own wallet at the expense of American same job. To be single mindedly focused consumers. The same is true of the great on profit is to be unconcerned about majority of interest groups whose lobby- irrelevant matters such as employees’ or ists infest Washington and other seats of customers’ skin color or sex. In contrast, government power. a capitalist intent on satisfying his own It's a mistake, however, to suppose racial or sexual bigotry when hiring that all champions of intrusive govern- employees or choosing customers will ment are out for gains at the expense of not focus exclusively on the bottom line. others. Many proponents of high taxes Statists also believe that large corpora- and intrusive government sincerely tions are simultaneously obsessed with believe that the state can outperform the profits and indifferent to relatively small market. expenses. | attended a conference recent- The sincerity of such beliefs, however, | ly at which a participant remarked that a does not render them correct. Indeed, $1 million per day fine doesn’t bother even the most sincere statist is typically Microsoft “because Microsoft is worth so confused that his ideas are a muddle billions.” Perhaps. But if the company is of foolish inconsistencies. indeed indifferent to being fined $1 mil- Consider that statists are firmly con- lion per day, then it is not (contrary to vinced that capitalism is bad because accusations) dogged about maximizing capitalists are concerned exclusively its profits. Microsoft and other corpora- with squeezing every drop of profit out tions will not be cavalier about even of their businesses. And yet, many sta- small unnecessary expenses if these cor- tists are no less firmly convinced that porations in fact are consumed with a capitalism promotes racial and sex passion for making their bottom lines as discrimination. large as possible. ===== PAGE 34 ===== Among my favorite statist inconsis- sage is clear that market forces unfeel- tencies is their insistence, in one breath, ingly unleash immense changes that that income inequality is an evil of the upset familiar and cherished ways of first rank, along with the accusation in life. the next breath, that free-market advo- The market is indeed a force for cates have an unsavory concern with change, but always change that results in material matters. Enemies of the market far more improvement than harm. Any- are forever applauding themselves for one who doubts that the market is a con- recognizing that non-material pursuits tinual source of improvements for are far more ennobling and satisfying humankind need only reflect on what than the pursuit of financial gain. life in America was like, say, 50 years Well, if non-material pursuits are ago. Polio still raged, only the wealthy deeper and more rewarding than are elite could afford air travel, all but the material pursuits, then income inequali- very rich sweated through the summer ty should rank very low on statists’ list heat without air conditioning, and even of capitalist outrages. The minimalist top-of-the-line automobiles broke down poet earns far less money than does the with appalling frequency. Advances CEO of Coca-Cola, but the poet presum- | spawned by entrepreneurs and made ably enjoys far greater spiritual and widely available by the free market mental rewards than does the corporate solved these and countless other prob- chieftain. Rather than taxing the CEO lems that plagued Americans in 1948. more heavily than the poet, perhaps gov- It’s true that workers who manufac- ernment should offer the CEO a lower tax | tured iron lungs for polio victims suf- rate to help compensate him for his mea- | fered job losses when Dr. Jonas Salk ren- ger spiritual rewards. dered their services unnecessary. But Statists are also inconsistent in their should we condemn the market for this assessments of self-interested actions. change? Or should we applaud the mar- Corporations are scolded for seeking ket for making possible Salk’s cure? The profits for their shareholders, while answer is obvious—and the same labor unions are glorified for seeking answer holds for all changes, big and higher wages for their workers. There small, promoted by free markets. are, of course, differences between the Yet it is these improvements that sta- self-interested actions of private corpora- | tists condemn—while going on in speech tions and those of labor unions. Corpora- | after speech about the nobleness of tions unaided by government privilege efforts to “change the world.” profit only by making those with whom They can’t have it both ways. If they deal better off. Modern labor change is bad, then it’s bad whether it’s unions, in contrast, derive most of their achieved by government or by markets. effectiveness from government privi- If some change is acceptable, then sta- leges and achieve their gains only by tists must make the case that change making those with whom they deal— sponsored by government is superior to and even many with whom they do not change sponsored by markets. But such deal!—worse off. a case is never made. Statists are content Another statist inconsistency is the to condemn market-directed change and confused attitude toward change. Sta- to praise all change that results in greater tists today condemn the market because politicization of our lives. it brings change. Once-thriving indus- If inconsistency of thought is a symp- tries are rendered obsolete by newer tom of bad ideas, then the “ideas” sport- products and sources of supply. Towns ed by statists are surely about as bad as once built around a particular industry ideas get. are depopulated by the demise of that industry. Dejected workers, pink slips in hand, trudge haplessly across the televi- 0D 72 / J sion screen. Abandoned factories, win- dows broken and weeds overrunning their parking lots, appear in faux- Donald J. Boudreaux poignant newspaper photos. The mes- President ===== PAGE 35 ===== June Book Sale ust in time for vacation reading enjoyment: big savings on selected books from FEE’s inventory. Hurry! Offer ends June 30, 1998. FREEMAN CLASSICS JOHN T. FLYNN Free to Try Forgotten Lessons: Selected Essays of The entrepreneur is celebrated as the John T. Flynn moving force of economic activity and A collection of John Flynn's best essays on progress. the growth of the State in twentieth-century 141 pages, paper $3:95 sale $4.95 America. (Edited by Gregory P. 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The Social Security Fraud 329 pages, paper $1995 sale $5.95 The book dissects the inherent problems surrounding America’s Social Security For a complete list of FEE's special system. book sales, please visit our web site: 209 pages, paper $3495 sale $6.95 http://www. fee.org Postage & handling: Please add $3 per order of $25 or less; $4 per order of $26-$50; $5 per order of more than $50. Send your order, with accompanying check or money order to FEE, 30 South Broadway, Irvington-on- Hudson, New York 10533. Visa and MasterCard telephone and fax orders ($10 minimum) are welcomed. (800) 452-3518; fax (914) 591-8910. Booksellers and others who wish to order in quantity should call Renée Oechsner, at (914) 591-7230. ===== PAGE 36 ===== The Foundation for Economic Education is proud to present the first in its newly inaugurated series of Occasional Papers . . . 3 Libertarian Essays FEE OCCASIONAL PAPER / ONE by Daniel B. Klein “Dan Klein's essays are a fine example of the strength of libertarianism, not as a dogma but as a paradigm or a research agenda. They illustrate some of the many interesting questions to be explored from a libertarian perspective. Especially useful is Klein's investigation of the crucial connection between liberty and responsibility, and how government undermines responsibility through indulgence and restricts liberty through coercion.” —David Boaz, Author, Libertarianism: A Primer; Executive Vice President, Cato Institute he first two essays in this collection explore the moral consequences of govern- ment policy. Those consequences are personal, as the rules within which one lives affect the meaning of one’s life, and political, as the character of a people affects the determination of policy, partly by affecting the extent to which justifica- tions for policy become valid. The two essays develop the idea of dignity, and argue that blows to liberty and blows to responsibility feed on each other through dignity. Morals and government policy work as an interdependent system, a sys- tem which might begin steering itself toward results no one originally wanted. Professor Klein's third essay is titled “If Government Is So Villainous, How Come Government Officials Don’t Seem Like Villains?” It explores beliefs within government agencies and suggests that in government honest people believe in the goodness of bad policies. Like the previous essays, it maintains that communities work by cultural systems and the yearning to find meaning in life. The Occasional Paper suggests that liberty is the legal framework that best suits the meaning-seeking animal. DANIEL B. KLEIN received his bachelor’s degree in economics at George Mason University (1983) and his doctoral degree at New York University (1989). He is now associate professor of economics at Santa Clara University. He has worked and published with the Cato Institute, the Reason Foundation, the Independent Institute, the Institute of Economic Affairs, the Brookings Institution, and the Foundation for Economic Education. ISSN 1098-1276 + ISBN 1-57246-100-4 * 95pages *¢ indexed * paper $8.50 TO ORDER, CALL (800) 452-3518, FAX (914) 591-8910, OR E-MAIL freeman@fee.org ===== PAGE 37 ===== A PEACEFUL FERMENT IN SOMALIA 353 tures means no bureaucratic interference. Soon after the British and Italian withdraw- Somalis seem particularly well adapted to al, the Somalis realized that independence operating in such an environment. . . . The clan had not made them free. The foreign oppres- tradition makes any form of central govern- sors had left, but their tool of oppression, the ment difficult here. . . . Somalis consider them- state, remained intact. Three decades later, selves born free. To them, the State equals reg- therefore, with the intention of restoring the istration, regulation and restriction.” pre-colonial indigenous political tradition, the All these reports, and more, lent credence leading tribes within the republic joined to my friends’ statement that when the Soma- forces and deliberately dismantled the central lis dismantled their state in 1991, tribal gov- government. The United Nations attempted ernments had quickly filled the vacuum. That militarily to reinstate it but was defeated, and had come as a surprise, they said, to those Somalis themselves made several splinter who remembered the determined efforts of attempts at state formation, notably in the state to eliminate Somalia’s traditional Mogadishu and Hargeisa. Such attempts judges and police from the political scene. accounted for most of the turmoil in the years But tribal government remained the govern- following the dissolution of the central gov- ment of choice for Somalis. According to my ernment in 1991. friends, this indigenous government, com- The basic problem confronting the Somalis posed of part-time police and law courts, had is that voting democracy cannot work in a trib- been effective during the past seven years in al or clan system, where any coercive political keeping the peace in the rural areas. They said apparatus with power to tax and confer patron- that many observers thoughtlessly describe age is seen as a prize to be controlled for the this situation as anarchy whereas, in reality, it benefit of one’s kindred. The presence or even is government based on natural law. the prospect, therefore, of a state apparatus keeps the country in continual agitation. Unraveling the Somali Political That explains the Somali “warlords.” These E quation are warriors who gain their support within their tribes by holding out the promise that Before the colonial era, the homeland of they will re-establish the state and control it in the Somali nation was the whole of the Horn order to grant privileges to their kinsmen and of Africa, bounded on the north and east by prevent others from doing the same to them. the Indian Ocean, on the south by the Tana In dismantling their state in 1991, the Soma- River in what is now Kenya, and on the west lis did not realize that the mere possibility of by the Ethiopian and Galla highlands. It was a future state would be enough, in the short fragmented into five parts by the colonial term at least, to prevent peace from returning powers—France, England, Italy, and Ethiopia. to their country. If the tribes could convinc- In 1960, the British withdrew from the north ingly declare that their territory would remain and the Italians from the south, leaving in forever stateless, no one would listen to these their place one government over the former warriors and they would have no option but to two colonies. There resulted a v-shaped coun- place themselves again under the discipline of try, the Republic of Somalia—a 1,600-mile tribal customary law. The Somali nation belt of coastline around both sides of the Horn would have neutralized its warlords. with an average depth of some 200 miles. Unfortunately, there has been no practical The French subsequently withdrew from possibility of that happening. The mere likeli- the extreme northwest coast, leaving the hood of a central government has been like Republic of Djibouti. A fourth part of the the golden apple of Eris, Greek goddess of original Somali nation is now controlled by discord. Eris rolled a golden apple into the Kenya. The fifth part lies inland, comprising hall on Mount Olympus where all the gods the heartland of the Horn. It is wholly within were partying without (for good reason) hav- Ethiopia and nominally independent—hence ing invited her. Inscribed “For the fairest,” the unrestricted movement is permitted between golden apple quickly accomplished its intend- Ethiopia and Somalia. ed purpose of setting the gods to fighting. ===== PAGE 38 ===== 354 THE FREEMAN e JUNE 1998 This was the Somalian stand-off for seven The “American Text” years, with the country gradually stabilizing as the prospect of a new Somali state receded. ’ ¢ ’ . Were there such a category, Somalia would MY friends, received from private sources in now qualify for the Guinness record for the the United States a proposal for a Somali con- country with the longest absence of govern- Stitution drafted by anthropologist and busi- ment. Meanwhile, the world’s “family of nessman James C. Bennett of Baltimore. It nations” has become increasingly uncomfort- Was offered as an alternative to the constitu- able that any place on the globe should be out- tion drafted in London, and the two were soon side the jurisdiction of a state, especially fora dubbed the “English text” and the “American significant length of time and with indications text.” The latter provided for a government of that its inhabitants might not only survive, but Such exceedingly limited functions that it prosper. could not become a bone of contention simply Could anything be more unsettling to those because it held out no prospect of power and having a stake in perpetuating widespread Patronage. It would provide the structure of a belief in the necessity of the state? Moreover, central government as required by the interna- the donor governments and international tional community while scrupulously preserv- financial organizations mentioned by ing the autonomy of the tribes. The basic prin- Mohamed Mohamed Sheikh cannot very well ~ iples of the American text include:* regulate a national economy in the absence of a central government into which to channel Sovereignty. Sovereignty resides in individ- funds. Since the failure, therefore, of the first ual Somali citizens, over whom the Somali international attempt to restore the Somali Federation shall exert no powers. The Federa- state, pressure has been building for a second. tion’s main purpose will be to conduct a for- Plans took shape for a “Somali peace con- €1gn policy, to enable foreigners to deal with ference” in November 1997. Participating the Somali nation as a whole, and to make the would be the United Nations, European Somalis credible in the eyes and minds of for- Union, Arab League, Italy and Ethiopia, with eign governments and individuals. It shall not U.S. funding. Their reported agenda: to bring regulate relations between Somalis, between an end to chaos and restore peace in Somalia Somali communities, nor between Somali by instituting a central government. The regions. The Xeer (customary law, pro- European Union engaged a London universi- nounced “hair”) will govern that. "ty professor to draft a constitution and, as Then a small group of Somalis, including incentive for the Somalis, promised a sub- Customary Law. The Somali nation has stantial financial aid package for the new always been based on the Xeer, even during government. the period of colonization (for disputes Twenty-six Somali political groups, most involving only Somalis and not colonials) and led by military figures, met in Cairo. The after independence. The unity and peace of resulting “Cairo Accord” declared a provision- the Somalis, as well as their mutual under- al government in which one of Somalia’s larg- standing, are based on the Xeer. The Xeer er tribes, the Hawiye, would assume the key stands at the center of the Somali identity; executive positions and control more than 50 without it there could not be a Somali nation. percent of the votes in the parliament. Despite its strong endorsement by the UN, the Euro- Foreign Policy. The Somali Federation will pean Union, and the Arab League, the accord appoint federal ambassadors abroad, but was soon forgotten. Significantly, almost none every tribe will be entitled to appoint its own of the negotiations had dealt with the constitu- consuls, who shall enjoy federal status. Debts tional questions of what powers the new state to foreigners incurred by the Somali state should have or how they should be limited; the prior to its collapse in January 1991 will be only issue was how control would be shared settled by a corporation to be established by among the mostly military figures present. the new Federation. ===== PAGE 39 ===== A PEACEFUL FERMENT IN SOMALIA 355 Peace and Development. To preserve the opposed to a democracy, theocracy, monar- peace and facilitate the development of the chy, oligarchy, or other form of political gov- nation, the Somali Federation shall have no ernment. The term, a little-used nineteenth- police, no military, no taxation, no courts of century word compounded from the Greek, law, and no majority rule. literally means “rule by judges.” Many state- less societies have been kritarchies, including If the American text should become the the well-known example of the Old Testament basis for a national organization of the Soma- Jews during the time of the Judges. The pro- lis, it would open the way for the tribes to posed free enclaves also would be kritarchies, develop enterprise zones or free cities as a since they would be founded solely on the bridge to full participation in the modern principles of successful modern commerce world. But success would depend on a stable and the traditional Xeer. social environment within Somalia that ~~ One principle of the Xeer, like that of the offered effective protection of private property customary law of many kritarchies, is that the and freedom of contract. In a situation of clan or other kinship group in effect insures autonomous tribes and no strong central gov- its members, paying compensation in the ernment, how would this be assured? event any of its members injures someone of another group. This is how the various Soma- l1 tribes in the absence of a central state man- Kritarchy aged to live for untold centuries in relative harmony. It is a principle ideally suited for adaptation to an urban society, where that function can be performed by commercial insurance. The only requirement, in fact, of visitors to Somalia under the proposed consti- tution would be that they have adequate insur- ance against any liability that might incur under the Xeer. I wish my Somali friends well. Such a rad- ical experiment to find better ways of protect- ing private property and freedom of exchange, the underpinnings of all other free- dom, is long overdue in the world. It was in 1776 that the last great experiment of this “kind was made. Whether or not it succeeds today as envisioned by my friends, this intel- lectual ferment in Somalia augurs a better future for us all. [] I began by saying that a social experiment with far-reaching implications is shaping up in Somalia. That experiment consists in the Somalis seeking an alternative to legislative law by looking to their existing customary tribal law, the Xeer, and its further develop- ment to serve all of the needs of an emerging urban society. The Xeer promises to become one of the great bodies of customary law, like Anglo-American common law or Jewish tra- ditional law (Halacha). These legal codes are flexible, responsive, and can be maintained without a large central state or legislative apparatus. A small amount of private funding has just been committed to begin codifying the Xeer. While the Xeerada (plural) appear to vary from tribe to tribe, it is only because each contains mythology particular to its tribe. In , . . . 1. Ann M. Simmons, “A Somali Alternative to Chaos,” Los essence, the Xeerada are alike in protecting sngeles Times, July 9, 1997. freedom of movement, free trade, and other 2. Mohamed Mohamed Sheikh, “Does Somalia Really Need a . ge gq q- Government?” Signed editorial in The Sun, Addis Ababa, Ethiopia, individual freedoms, and forbidding the con- August 28, 1997. It is not quite true that imports are duty free, as stat- trary—including taxation and legislation. ed here, but they are virtually so, since port officials need only levy The S li t] did t start with th what little is required locally to operate the port. € Somali nation did not start wi € 3. Simon Homer, “Somalia: A Country Report,” APC-EC Couri- tribes having a common language but by their er (Commission of the European Communities in Brussels) No. 162, pages 46-66. common observance of the Xeer. Hence the 4. 1 have slightly edited and abbreviated these principles from a law is called both father and child of the draftreceived December 22, 1997, from my Somali friends, to whom S li . I am indebted as the chief source of information used in this article. omali nation. Until such time as they no longer wish to remain anonymous, A society organized strictly in accordance inquiries about these libertarian developments in Somalia can be : : directed to me at SM@Look.net or by regular mail at P.O. Box 180, with the Xeer is technically a “kritarchy,” as Tonopah Nv 89040 fet on Dy fegliar mart gt =, Tox ===== PAGE 40 ===== Peripatetics by Sheldon Richman The Idiocy of Autocracy n any dictatorship, the biggest fool is the markets, money, and exchange. Castro may dictator. think he and his experts plan the economy, but It takes a prodigious amount of self- that is the biggest self-deception of all. deception to believe you are running a coun- Every day the Cuban people make count- try. I was reminded of that as I heard about less decisions, transactions, and calculations Fidel Castro’s preparations for the Pope’s visit about which the dictator and his bureaucrats to Cuba last winter. In an interview on Cuban will never know anything. Thanks to the black television, Castro said he didn’t think the visit and gray markets, Cubans most of the time would lead to the end of socialism in Cuba. buy and sell and produce, within constraints, (John Paul II, of course, is widely credited according to their own lights. The “planners” with contributing to the peaceful toppling of issue decrees, but they know they will often the Soviet-backed regime in his native be ignored. Even if they are obeyed, the plan- Poland.) Here is where the Cuban ruler ners can’t know what the rippling unintended reveals the depths of his self-deception. consequences will be. Often they are opposite There is no socialism in Cuba. of what was expected. Human action is unpre- Consider this headline in the Washington dictable that way. Post just before the visit: “Cubans Scurry To Ask yourself: how can the small group of Capitalize On Papal Visit, Cost of Hotels, Ser- bureaucrats constituting the government of vices Soars for Foreign Influx.” Translation: Cuba possibly direct the actions of over ten the Cuban people are entrepreneurs behaving million people, each with his own preferences as though they live in a capitalist country. and aspirations? It would take as many Almost 40 years of “socialism” have failed to bureaucrats as citizens to attempt to pull that propagandize or breed capitalism out of them. off. But even that wouldn’t help, because the Could capitalism be the political economy of bureaucrats themselves are already too busy human nature? It would seem so. wheeling and dealing. The government calls But is there really no socialism, or commu- that “corruption.” But for such corruption the nism, in Cuba? We have been told for decades people would have all starved long ago. that Castro is a Marxist. He claims to be in the The plan is a sham. If Castro has any sense, vanguard of the Marxist revolution. As Marx he knows it. wrote of it, socialism was not only to include In a path-breaking demolition of socialist state ownership of the means of production, theory almost 80 years ago, Ludwig von Mises but also the abolition of markets, money, and called socialism “impossible.” He meant that exchange. In Cuba the state owns the major literally. He was ridiculed for making what industries and the land; nevertheless, there are seemed a patently absurd statement. As years passed, people, pointing to the Soviet Union, Sheldon Richman is editor of The Freeman. asked how socialism could be impossible. 356 ===== PAGE 41 ===== 357 The critics missed Mises’s point. The great ism, as an economic system, is impossible. liberal and Austrian economist had said that The existence of the Soviet Union did not an economy of any complexity could not ade- refute Mises. After their disastrous postrevolu- quately satisfy consumers in the absence of tionary experience with War Communism money, markets for capital goods, and private (Trotsky recollected that the country looked property because people would have no way into the “abyss”) and the advent of Lenin’ to make the calculations necessary to compar- New Economic Policy, the Bolsheviks never ing and choosing among alternative uses of again tried to abolish money, markets, and resources. Prices permit disparate things—a exchange. The government controlled most supply of steel, a parcel of land, a machine, a capital goods, but under the surface, markets— quantity of labor services—to be stated in hampered to be sure—hummed. The West, terms of a common denominator, the mone- moreover, was available for mimicking when tary unit. They can then be subjected to cal- necessary. Castro followed the Soviet model. culation. The balance sheet can be filled out. I am not saying Cuba has a free market. I'm Entrepreneurs can compare the price of the saying it has an unfree market. That is far dif- factors of production with the price of final ferent from socialism, the obliteration of the consumer goods and determine if they will market. Like the old Soviet Union, Cuba suf- have a profit or loss at the end of the day. That fers from a government-saturated market. The information reveals whether resources are state has clamped on so many regulations and being used as consumers wish. taxes that the limits within which people can Responding to Mises, so-called “market act are narrow. That is why Cuba is poor, lack- socialists” said prices could be simulated ing basic things we take for granted. through bureaucratic trial and error or by But within those constraints, the Cubans solving a series of equations. Startlingly, even behave like entrepreneurs—buying low, selling some who grasped the virtues of capitalism high, profiteering, speculating, seeking at every agreed: the renowned Harvard University turn to improve their circumstances. Despite economist Joseph Schumpeter declared the what they may say, in their conduct Cubans are socialists the winners in the famous “calcula- about as socialistic as Bill Gates and Warren tion debate” launched by Mises and carried Buffett. (See “Inventing Life in Cuba” by Marc on by FA. Hayek. Directly repudiating Mises Olshan, The Freeman, April 1998.) by name, Schumpeter wrote in Capitalism, Since Cuba has a government-saturated Socialism, and Democracy (Harper & Broth- market economy, that makes it much more ers, 1942, p. 172), “There is nothing wrong like the United States than Americans would with the pure logic of socialism.” like to think. It is interesting, then, that Castro Hayek countered the “market socialists” by invited President Clinton to try to persuade pointing out that real prices cannot be created the Cuban people to give up “socialism.” by simultaneous equations or by bureaucrats What could he (and most of his opponents) playing at markets. Those prices would be possibly say? Get rid of government-provided empty, in contrast to market prices, which are education and health care? End state-guided rich in content. Markets—that is, actual investment? He’s for those things. The Amer- choices by sellers and buyers—reveal and ican peoples economic activities are con- stimulate the discovery of knowledge that strained by bureaucratic regulations, taxes, is otherwise left undiscovered. Market prices, subsidies, and enticing “services” only to a free to fluctuate spontaneously, deliver that lesser extent than the Cubans’ are. The inane ever-changing knowledge sufficiently to per- embargo on Cuban exports is one obvious mit effective economic calculation. To do example. Clinton and virtually everyone else their informative work, prices have to arise in government enthusiastically support those from real transactions. Without market restrictions. They want even more. prices (a redundancy, really) there would be That’s why the thought of the President try- no way to economize resources in behalf of ing to persuade the Cuban people to give up consumer well-being. As Mises said, social- “socialism” is so funny. ===== PAGE 42 ===== THEFREEMAN [DEAS ON UBERTY — Statistics: A Vehicle for Collectivist Mischief by John T. Wenders Sr John Cowperthwaite served in Britains Most of those statistics are simply synthet- administration of Hong Kong for over 25 ic. They force disparate things into an artifi- years. From 1961 to 197] he was Hong Kong’s cial whole that exists only in the mind of the financial secretary, a position that gave him synthesizer. The statistics are the lifeblood of vast power over that colony’s economic affairs. those whose view of society submerges the It was under his guidance that the theory of individual in such groups as the poor, blacks, positive nonintervention was used to promote men, women, children, gays, senior citizens, Hong Kong’s astounding economic progress. to name a few. To the synthesizer, the individ- One of Sir John’s crusades was to prevent ual has an identity only as he is a member of the gathering of statistics on many aspects of some collection of people. Hong Kong's life. In Hong Kong, he said, “we For collectivists, not only is the individual are in the happy position where the leverage identified by his group, but so is his behavior. exercised by the government on the economy Thus, we can no longer tell if one’s behavior is so small that it is not necessary, nor even of is good or bad, right or wrong, until we find any particular value, to have these figures out his group identity. And individuals are available for the formulation of policy” For taught to test their behavior, not against any him, statistics were the tools of intervention- individual standard, but how it compares with ists anxious to use the government to produce what is socially—collectively—acceptable in an outcome consistent with their collectivist their group. When someone’s behavior view of society. does not measure up, it is society’s fault, not Amen. his. The United States has taken a different Similarly, class welfare is defined, from route. The U.S. Constitution provides for the above, by the collectivized statistic without enumeration of citizens for the purpose of any reference to-those who comprise the determining the number of each state’s repre- class. There is some higher measure of wel- sentatives in Congress. However, over the fare that exists only in the eyes of the collec- years, the Census Bureau has embarked on tivist. In this world, the collective can be the collection of statistics far beyond those “better off” or “worse off” even if no indi- necessary for that purpose. We now gather vidual in it is. Since income equality is data detailing every nook and cranny of our “good” in the eyes of the collectivist, a soci- lives, thus providing fodder for the collectivist ety where everyone is equally poor is better meddlers. than one where everyone is unequally richer. Any grouping of people, defined from above, John Wenders is professor of economics at the Uni- 1S automatically better if minorities are repre- versity of Idaho. sented at least proportionally. Individual 358 ===== PAGE 43 ===== 359 human values are submerged for some col- Synthetic statistics about the collective results lective, suprahuman measure of value that are irrelevant. exists only in the mind of the collectivist. Of course, even if the underlying process is Suprahuman values are abstractions that have right from each individual’s perspective, col- no meaning for individuals. lectivists will still claim that any statistics that Statistics necessarily aggregate across indi- show inequality or disproportionality prove viduals. These aggregates are, of course, the that something is wrong. Beneath this claim is result of human action, but as aggregates they the implicit, but hotly denied, belief that peo- are not of human design. The unit of society is ple are all the same. The idea that people are the individual, not the group. In aggregation different, and that statistical disparity merely individual action and choice are lost. The only reflects this, simply does not occur to the col- groups that matter to individuals are those lectivists. These are the same people who cel- voluntarily joined. Any other group into ebrate multiculturalism and moral relativism. which an individual is classified comes from The operational consequence of statistical the outside and exists only in the mind of the collectivism is the demand for the state to deal classifier. collectively, and coercively, with the artificial Statistics that purport to describe groups problems suggested by these statistics. Differ- say nothing about the causal mechanism that ences become gaps: gaps in income, gaps in produced the data. In many cases, the education, gaps in housing, gaps in health, observed statistic results from individuals gaps in other necessities. Problems are creat- each choosing what is best for them. If this is ed and tackled from above by the collectivist true, then the resulting statistic is an artifact mindset consumed with gapology. Leaving that tells us nothing about the well-being of individuals and their associations alone is the individuals behind it. If the underlying ruled out. Statistics fuel the interventionist decisions were all made by people doing what engine. was best for them, then the outcome must be One wonders what Sir John must be think- best from the perspective of those people. ing now. OJ thes en hm tn spn “A fabulous journal... a beacon MEDICAL of hope and intellectual pursuit] SENTINEI in medical jo ” The Medical Sentinel is the official, bimonthly, peer-reviewed journal of the Association of American Physicians and Surgeons. The AAPS is the national physician organization that successfully Ld Manages (3 F LT huey Prete [7 The Contato in cnt meng } Bepert rae Boe Same h sued the Clinton Administration over the secret deal- [ - mea i ee ings of Hillary Clinton's Health Care Task Force. | » —.2% "| Zsa Jane M. Orient, M.D., Executive Director, AAPS; Miguel A. Faria, Jr, M.D, Editor-in-Chief, Medical Sentinel. Commentaries T Weatlh Carn athag The 4 A Sorte, ™ © Cries “The Medical Sentinel is committed to...defense of the practice of private medicine, the tenets and principles set forth in the Oath of Hippocrates, individually based medical ethics, and the sanctity of the patient-doctor relationship...dedicated to the pursuit of liberty, free markets, and integrity in medical research...” Call 1-800-757-9873 Su . . qe ISSN Numb $45.00 Th Hacienda Publishing 1086-4784 Fax: 1- 912-757-9725 « PO.Box 13648¢ Macon, GAe 31208-3648 ===== PAGE 44 ===== Economic Notions by Dwight R. Lee ¥ Economics The Power of Incentives he surest way to get people to behave in Convincing people that incentives are desirable ways is to reward them for appropriate is not nearly as difficult as deter- doing so—in other words provide them with mining the appropriate incentives. Of course, incentives. This is so obvious that you might we want incentives that motivate people to think it hardly deserves mention. But it does. behave in desirable ways, but what is desir- You might say that people shouldn’t have to able? In some situations, the answer is rather be rewarded (bribed) to do desirable things. obvious. But not always. Even when you acknowledge that incentives Every time you do a good thing, you neces- are necessary, it is not obvious how to estab- sarily reduce your ability to do something else lish the ones that motivate desirable action. good. This is an unavoidable implication of In one of my classes, I recently encountered scarcity and is captured in the concept of the emotional resistance some people have to opportunity cost, which I shall consider in using incentives to accomplish good things. I more detail in a future column. There are was pointing out that the elephant populations always tradeoffs, and we often need informa- in Zimbabwe and South Africa were expand- tion from many sources to know the best ing because policies there allow people to course of action. So the two important func- profit from maintaining elephant herds. A stu- tions of incentives are: (1) to communicate dent who had stressed his environmental sen- information on the best things to do and (2) to sitivity responded that he would rather not see motivate people to do them. the elephant saved if the only way to do so was by relying on people’s greed. In other Incentives and the Treatment words, he was willing to stand on principle as . long as only the elephants suffered the conse- of Prisoners quences. His principle, one that I suspect was In some cases the desirable course of action shared by others in the class, was that good is clear, and these cases let us concentrate on things should be motivated by compassion the power of incentives to motivate people. and concern, not self-interest. I couldn’t resist The British government’s practice of contract- telling him that I would be impressed with his ing with ship captains to transport prisoners to moral stance if, when he required delicate Australia in the 1860s provides a good exam- surgery to save his life, he refused to go to a ple. The survival rate of the prisoners shipped surgeon and let his mother perform the oper- to Australia was only 40 percent, which ation instead. everyone knew was much too low. Humani- tarian groups, the church, and governmental Dwight Lee is Ramsey Professor of Economics and agencies appealed to the captains on moral Private Enterprise Economics at the University of grounds to improve the survival rate with Georgia. more decent treatment. Despite these appeals, 360 ===== PAGE 45 ===== 361 the survival rate remained at 40 percent. Traffic demonstrates the importance of Finally, an economist named Edwin Chad- general rules in motivating cooperation. As wick recommended a change in incentives. aggravating as rush-hour traffic is, traffic Instead of paying the captains a fee for each flows reflect an amazing amount of sponta- prisoner who walked onto the ship in England, neous social cooperation. Without that coop- Chadwick suggested paying them for each eration, tens of thousands of commuters in prisoner who walked off the ship in Australia. every large city would get caught in a hope- The improvement was immediate and dramat- less tangle of traffic. The basic rules that ic. The survival rate increased to over 98 per- allow motorists to so effectively cooperate cent, as the captains now faced a strong incen- with one another are simple: (1) drive on the tive to protect the health of prisoners by right side of the road; (2) go on green, either reducing the number crowded into each ship speed up or prepare to stop on yellow, and and providing them with better food and. stop on red; (3) don’t exceed the posted speed hygiene in passage.! limit by more than ten miles per hour; and (4) don’t touch. These rules convert our incentive Creating Incentives Directly to get to our destinations safely and conve- . niently into a pattern of accommodating and Indirectly behavior that serves the interests of all.2 Desirable incentives can sometimes be cre- The market economy is the ultimate exam- ated directly, as in the case of shipping pris- ple of how a set of rules can create a setting oners. You know what you want done, so you in which private incentives motivate social create a reward (say, a cash payment) for cooperation. Market economies don’t create doing it. Unfortunately, in most cases the type incentives directly. Indeed, in a literal sense, of behavior we desire requires subtly balanc- markets don’t create incentives at all. The ing competing objectives. In such cases, cre- most important incentives come from the ating a direct incentive to do one thing can be subjective desires of individuals: the incen- too effective because it causes people to tive to find love, to earn respect, to make ignore other things. the world a better place, to provide for their The former Soviet Union was full of the per- families. Markets are the rules of conduct versities that can result from the direct applica- that harmonize these various incentives by tion of incentives. Managers responded to making it possible for people to communi- incentives to increase the production of shoes, cate their desires to others. The prices, prof- for example, by making only a few sizes, hard- its, and losses commonly referred to as mar- ly caring which sizes best fit consumers. Such ket incentives, are created by people’s inter- incentives affected people’s behavior, but they acting with one another. These incentives, failed to promote the social cooperation neces- which can be communicated only through sary for a productive economy. markets, contain information that promotes When the objective is to motivate people to social cooperation. OJ cooperate, desirable results can rarely be real- 1. For more on this example, see Robert B. Ekelund, Jr., and ized by directly establishing Incentives. Richard Ault, Intermediate Microeconomics: Theory and Applica- Instead, incentives have to be established indi- tions (Lexington, Mass.: D.C. Heath and Company, 1995), pp. 21-22. 2. The example of traffic flow comes from Paul Heyne, The Eco- rectly through a set of general rules that allow nomic Way of Thinking, 8th ed. (Upper Saddle River, N.J.: Prentice- them to emerge from social interaction. Hall, Inc.), chapter 1. The apple icon § identifies Freeman articles that are appropriate for teaching high- school students four major subjects: economics, history, government, and philosophy. We also provide sample lesson plans for these articles on our web-site www.fee.org and in written form. Teachers and homeschooling parents need only to visit our website or request written lesson plans to take advantage of this unique service. ===== PAGE 46 ===== THEFREEMAN @ History IDEAS ON UBERTY LC] Should Government Build the Railroads? by Burton Folsom, Jr. O: July 12, 1831, President Andrew Jack- Great Lakes with the Atlantic coast—and it son, who was no prankster, did some- was built not by entrepreneurs but by the state thing that made many people laugh, some of New York. Suddenly New York City could curse, and others rub their eyes in disbelief. trade with farms and cities throughout the He appointed 19-year-old Stevens T. Mason midwest. Profits from tolls flowed into the to be secretary and acting governor of the state, and the whole Great Lakes region was Michigan Territory. open to settlement and trade. Granted, Mason was a very intelligent Shortly after 1825, tens of thousands of teenager and his family was nationally promi- New Yorkers and New Englanders filtered nent. But surely, his critics wondered, this was into Michigan via the Erie Canal. Governor the worst case of political patronage ever Mason himself used the Erie Canal eagerly seen. During the next ten years, however, the when he had to go to Washington to see Pres- youthful Mason would often vindicate Jack- ident Jackson. Almost everyone in Michigan son’s judgment. Mason went from acting gov- gushed with praise for this new canal, which ernor to elected governor. He plotted the strat- brought them immigrants and took their egy that brought Michigan into the Union, exports. The message seemed obvious: states and he made deals that defined Michigans that want to get ahead need active govern- boundaries on two peninsulas. Unfortunately, ments to tax their citizens to build a trans- he also launched a gigantic scheme of state- portation network. run railroads and canals that almost bankrupt- To compete with New York, for example, ed the state. As a result, Michigan voters went Pennsylvania spent $14.6 million on its Main to the polls en masse to make their state a Line Canal from Philadelphia to Pittsburgh. haven for free enterprise for the rest of the Maryland and Massachusetts joined in the century. rush with a variety of state-supported proj- The Mason story begins not in Michigan, ects. Illinois and Indiana began elaborate but in New York, along a remarkable ditch canal networks in 1837, just when Michigan that was dug in the 1820s. The Erie Canal, an entered the Union. This was when railroads astonishing achievement in engineering, had a were being built, and some states began to lay big impact on American thinking. Here we track and buy locomotives. had a canal 364 miles long that connected the The State as Creator Burton Folsom is senior fellow in economic educa- . . . tion with the Mackinac Center for Public Policy in To Mason this was all exhilarating. Maybe Midland, Michigan. This essay is adapted from his the traditional theory of limited government book Empire Builders (Rhodes and Easton, 1998). was wrong. Maybe states could be creators, at 362 ===== PAGE 47 ===== 363 least in the area of transportation. And after state. What would be thought of the policy of all, it was state governments, not the one in surrendering that great work to the control of Washington, that were building these canals. a private corporation[?]” Even as territorial governor, Mason urged The example of the Erie Canal had become Michigan to lay the foundation for the state to the ace that trumped all opposing arguments. build internal improvements. When delegates And if one state subsidy was good, two must met in 1835 to write the Michigan constitu- be better, and three better yet. Michiganians tion, they—with Mason’s encouragement— were so confident that state projects would wrote the following into law: flourish that they promised to build two rail- roads from Lake Erie to Lake Michigan, and Internal improvements shall be encouraged a couple of major canals across the state as by the government of this state; and it shall well. be the duty of the legislature, as soon as may be, to make provisions by law for Bad Luck, Bad Judgment ascertaining the proper objects of improve- ment, in relation to [roads], Canals, and Mason thought the state should spend $5 navigable waters. . . . million to build these projects. Actually, that was just start-up money. As soon as the antic- In other words, Michigan’s constitution ipated tolls started pouring in—as happened almost required the state to fund internal with the Erie Canal—the state could then improvements. build more. The legislature approved the $5 After this constitution was adopted, Mason million. Then the legislature authorized the publicly supported an activist state govern- governor to negotiate a $5 million loan with ment. “The spirit and enterprise which has the lender of his choice under the best terms arisen among our citizens, if fostered and he could get, as long as he didn’t exceed 5/4 encouraged by the State, cannot fail to lead to percent. The state, in this arrangement, would lasting prosperity,” Mason said. By 1837, issue bonds for the $5 million and pay them three weeks before Michigan entered the back as tolls came in from the railroads and Union, Mason was more urgent: “The period canals. has arrived when Michigan can no longer, Bad luck was the first problem to strike. without detriment to her standing and impor- The national economy went into a tailspin— tance as a state, delay the action necessary for the Panic of 1837—and capital was hard to the development of her vast resources and borrow. Then came distractions. While in wealth.” He was also optimistic: “we cannot New York to talk with investors and study the fail soon to reach that high destiny which bond market, Mason became sidetracked by awaits us. I . . . demand immediate legislative Julia Phelps, the daughter of a wealthy leather action.” merchant, Thaddeus Phelps. Mason courted With Mason leading the cheers, the legis- and married her in 1838. lature met and almost unanimously passed Then came bad judgment. Businesses were an elaborate internal improvements bill. failing because of the panic, and most sound Democrats and Whigs alike joined in the investors wanted more than 54 percent for public support for it. When the alternate their money. Mason finally persuaded the offi- strategy of private ownership came up, cers of the Morris Canal and Banking Com- Mason recommended that the canals and pany, a reputable firm, to buy the Michigan railroads “should never be beyond at least bonds. They promised to pay him the $5 mil- the partial control of the state.” “Extortion lion in regular $250,000 installments over from the public” was what Mason called one several years. Mason gave them the bonds and bill to charter a private railroad. Most Michi- went back to Michigan with their promise. ganians seemed to agree. The Detroit Daily The Morris Company turned most of the Advertiser noted that “Dewitt Clinton . . . bonds over to the Pennsylvania Bank of the built the [Erie] Canal with the funds of the United States, which then sent them to Europe ===== PAGE 48 ===== 364 THE FREEMAN e JUNE 1998 as collateral for its own investments. Within of iron strapped onto wooden rails. These rails three years, both the Morris Company and the were too fragile to carry heavy loads. Rather Pennsylvania Bank went broke, leaving than switch to the more expensive and durable Michigan with a $5 million debt scattered T-rails, the Board of Internal Improvements among European investors. chose to run regular heavy shipments over the existing tracks and repair them frequently. The Clinton-Kalamazoo Canal Not only was this practice dangerous, it was more costly to the state in the long run. An even greater disaster were the projects Robert Parks, who wrote a detailed book on Michigan built. First was a canal that was to Michigan’s railroads, found a deplorable situ- begin in Clinton Township near Detroit and ation on the Central: extend 216 miles west to Kalamazoo. The Clinton-Kalamazoo Canal began with high [O]verloaded locomotives were run at hopes and much fanfare. Mason broke ground twice the recommended safe speed. Under in Mt. Clemens in 1838 to celebrate the start the strain of continuous operation and jar- of digging. Bands, parades, speeches, and a ring impact of high speed on strap-iron 13-gun salute commemorated the occasion. rails, locomotives and cars were shaken to Then came reality. The Board of Internal pieces, and the cost of operation mounted Improvements, which Mason appointed to dramatically. Rails were broken and tim- supervise the projects, hired different contrac- bers crushed under the heavy loads bounc- tors for each mile of the canal, and these con- ing over their surface. tractors each had different ideas on how to build a canal. One thing they all did wrong By 1846, the Central had been extended was to make the canal only 20 feet wide and only to Kalamazoo. It had technically been four feet deep—too shallow for heavy freight profitable each year, but did not earn enough and too narrow for easy passing. to pay for needed repairs and new rails. After seven years and only 16 miles of dig- ging, the ledger for the unfinished canal read: she “Expenses $350,000, Toll Receipts $90.32» Lhe Michigan Southern With funding scarce, the board decided some- The second railroad, the Michigan South- time around 1843 to cut its losses, abandon ern, was to parallel the Central in the southern the canal, and focus on the two railroads. tier of counties from Monroe to New Buffalo. When construction on the canal stopped, Financially, the Southern was a stunning fail- some workers went unpaid and they stole ure. It had the same problem as the Central, materials from the three locks on the canal. with heavy loads on strap-iron rails. What’s Soon even the completed parts of the canal worse, the Southern was built poorly: the were ruined. roadbed was shaky and the curves too sharp for locomotives. Monroe, on Lake Erie, chi . proved to be too shallow a port for heavy The Michigan Central Railroad freight to enter or exit. Also, the towns west of The two railroads also had problems. The Monroe were too small to send much traffic Michigan Central was to go from Detroit west on the Southern. By 1846, the road had only through Ann Arbor, Jackson, and Kalamazoo reached Hillsdale, about half-way across the and on to St. Joseph on Lake Michigan. Boats state. It had cost over $1.2 million to build at St. Joseph could then take freight or pas- that far and its earnings were small. The road sengers to Chicago and back. The route went did little to move goods or people across the through prosperous wheat farms and the state; it drained capital that could have been state’s larger cities, but poor construction and used more wisely. management of the road drained most of its Michigan spent almost $4 million on the profits each year. The Central was built with Clinton-Kalamazoo Canal, the Michigan strap-iron rails, which consisted of thin strips Central, and the Michigan Southern. The state ===== PAGE 49 ===== SHOULD GOVERNMENT BUILD THE RAILROADS? 365 involved in almost unparalleled embarrass- ments so many of her sister states. Now, however, the period has arrived, when a corrective should be applied to the dangers which seem to surround her. A “false spirit of the age,” Mason said, may have moved states into the “fatal policy” of funding state projects. Michigan had too many railroads and canals and too few people to pay for them. But, as Mason had begun to realize, in a state-supported system this result would have been hard to avoid. The funding must come through the legislature, and the legislators naturally wanted projects in their districts. Jobs and markets were at stake. Some historians have suggested that if the Michigan Central had been the only pro- ject built, the strategy of state funding might have worked. But this was politically impossi- ble. The legislators in the towns along the Central —Detroit, Ann Arbor, and Kalama- zoo—needed votes from elsewhere to have their railroads built. The price for these votes spent about $70,000 surveying the Michigan was a commitment to build canals in Mt. Northern Railroad, from Port Huron to Lake Clemens and Saginaw and a railroad in Mon- Michigan, before abandoning it. It also spent roe and Hillsdale. $47,000 clearing the route for a canal and turnpike near Saginaw. Officials soon quit the Political M anipulation project, and the materials “either rotted or were expropriated by local residents.” Mason actually saw this problem early and Many of these problems occurred after tried to stop it by centralizing power in the Mason’s terms as governor, but he received Board of Internal Improvements. The board’s most of the blame because he had touted the decisions, however, proved to be just as polit- projects and signed the loan. In 1837, he had ically motivated as the legislature’s. Many narrowly won re-election, but in 1839 his legislators pressured (and possibly bribed) Whig critics were loud and brutal. Mason members and some secretly made money chose not to seek a third term. By that year he from projects. had begun to consider if the problems with the The story of Levi Humphrey is a case in projects were more than just bad luck or poor point. Mason appointed Humphrey, a key management. Maybe the state should never Democrat in the state, to the board. When have drifted into economic development. In Humphrey took bids for constructing the Mason's final address as governor, he said: Michigan Southern, he manipulated the results to assure that his friends in the firm of [T]he error, if error there is, was the ema- Cole and Clark won the contracts. Cole and nation of that false spirit of the age, which Clark then charged three to four times the forced states, as well as individuals, to market price for supplies. When the com- over-action and extended projects. If plaints reached the legislature, Cole and Clark Michigan has overtasked her energies and used some of their profits to bribe witnesses. resources, she stands not alone, but has The Whigs complained loudly, but when they fallen into that fatal policy, which has won the governorship in 1839, they did not do Stevens T. Mason ===== PAGE 50 ===== 366 THE FREEMAN e JUNE 1998 much better. In 1840, the board overspent its economic collapse in the state, forcing eight budget and covered it by falsifying its records. banks to close and new taxes to be imposed. The problem was not just corruption; it was Pennsylvanians did even worse. They spent human nature. Officials did not spend state $14.6 million on a risky canal from Philadel- money as wisely as they would have spent phia to Pittsburgh. The large losses on it each their own. If Mason, for example, had been a year helped force the state into default on its wealthy industrialist, would he have invested bonds. Several other states also defaulted on $5 million of his own money with bankers he their internal improvement bonds, which hardly knew during a national depression? damaged U.S. credit abroad and made Michi- Would any of the legislators have done so? gan look better. How much attention Mason The spending policies of the board raise paid to this we don’t know. He died of scarlet similar questions. In 1838, for example, it had fever on January 5, 1843, at age 31. a bridge built over the River Rouge. The prob- Mason was gone, but his “false spirit of the lem was that the bridge they decided to build age” speech in 1840 had reopened the debate could not carry heavy freight. The Central, in Michigan on the role of the state in eco- not the builders, lost almost $10,000 that year nomic development. Right from the start, the hauling passengers and freight around the government lost money building and operat- bridge. Since no individual owned the bridge, ing the state’s system of canals and railroads. no one had a direct financial stake in building William Woodbridge, the governor who fol- it well—or even protecting it. The next year lowed Mason, first suggested selling the rail- an arsonist destroyed the bridge. roads to entrepreneurs and getting govern- In another example, the board ordered iron ment out of the internal improvements busi- spikes for the Michigan Southern in 1841. ness. At first, many resisted the idea. The contractors, however, only put one spike Legislators wanted railroads in their districts in every other hole along the track. They stole at taxpayer expense; they worried that entre- the rest of the spikes and, when questioned, preneurs would build them elsewhere. they persuaded the board that the unused spikes were defective. The board did not own : 9 the spikes or even have to ride on the rickety The Errors of Our Policy... railroad that resulted; they simply believed As the number of blunders on the projects the contractors and left the track partly began to multiply, however, more pressure unspiked. came for the state to privatize. John Barry, The Boy Governor, no longer a boy, left who was elected governor after Woodbridge, office in 1840 at age 28. He had served almost echoed Mason and talked about “the spirit of nine years as secretary, acting governor, and the times unfortunately [becoming] the gov- elected governor. During this time, he had erning policy of states.” Barry argued that “in focused so intently on administration that he extraordinary cases only . . . should a state had left office almost penniless. He decided to undertake the construction of public works.” leave Michigan for New York City, his wife’s He continued: “Seeing now the errors of our home, and make his fortune there in law and policy and the evils resulting from a departure business. As he entered Buffalo and made his from correct principle, let us with the least way across the Erie Canal to New York City, possible delay correct the one by a return to he may have wondered why the experiment the other.” with an active government worked so much Thomas Cooley, Michigan’s most promi- better in New York than in Michigan. During nent lawyer in the 1800s, observed firsthand the next two years, however, if Mason studied the way the state ran its railroads. In a history local politics, he saw New York repeat Michi- of the state, he wrote, “Doubts were arising in gan’s experience. State legislators in districts the minds of the people whether the state had outside the Erie Canal area had won eight new been wise in undertaking the construction and canal projects at a cost of $9.4 million. These management” of internal improvements. new canals failed miserably and caused an “These doubts soon matured into a settled ===== PAGE 51 ===== SHOULD GOVERNMENT BUILD THE RAILROADS? 367 conviction that the management of railroads while keeping rates competitive, Michiganians was in its nature essentially a private business, knew they had learned something. They and ought to be in the hands of individuals. moved quickly to write this discovery into law. By common consent it came to be considered that the state in entering upon these works had A New Constitution made a serious mistake. By 1846 Governor Alpheus Felch, who had The next year, 1850, Michigan held a state followed Barry, carried the day for privatiza- constitutional convention. The proper role of tion. “The business of transporting passengers government was one of the issues. The 1835 and freight by railroad is clearly not within constitution, which mandated government the ordinary design of state government,” support for internal improvements, was Felch observed. The legislature finally agreed changed to include this: “The State shall not and voted to sell the state’s public works in subscribe to or be interested in the stock of 1846. The state took bids and sold the Central any company, association, or corporation.” for $2 million and the Southern for $500,000. Further, “the state shall not be a party to or As a result, Michigan recovered 90 percent of interested in any work of internal improve- its investment in the Central and 44 percent in ment, nor engaged in carrying on any such the Southern. If the losses on the canals and work” except for the donation of land. other projects are included, the state— The public debate that followed showed through this sale—recaptured about 55 per- much support for the new constitution. cent of its total investment in internal “Looking at it as a whole,” said the Grand improvements. This decision helped the state Rapids Enquirer, “we honestly believe that if cut its bureaucracy and also avoid bankruptcy. it had been adopted at the organization of our As a condition of the sale, the new railroad State Government, our State would now be owners had to agree to rebuild both lines with out of debt, prosperous, and flourishing.” In quality rails and extend them to Lake Michi- November 1850, the voters of Michigan over- gan within three years. It had taken the state whelmingly accepted the new constitution. nine years to move the lines not much more Michigan had learned from its history. The than half-way across the state; the new entre- building of railroads and the development of preneurs had to rebuild that part and complete resources—Ilumber, copper, and chemicals— the rest in just three years. When they did so, would be done by private enterprise. 0 ===== PAGE 52 ===== A Economic G Affairs Journal of the Institute of Economic Affairs Edited by Colin Robinson Economic Affairs is a journal for those interested in the applications of economic principles to practical affairs. It aims to stimulate debate on economic and social problems by asking its authors, while analysing complex issues, to make their analysis and conclusions accessible to a wide audience. Each issue has a theme on which the main articles focus, providing a succinct and up-to-date review of a particular field of applied economics. Additional articles cover topical issues. ORDER FORM Economic Affairs Subscription Rates, Volume 18/1998 ISSN 0265-0665 Published in: March, June, September and December Institutional Rates, £55.00 (UK-Europe), $101.00 (N. America), £61.00 (Rest of World) Schools Rate, £25.00 (UK-Europe), $50.00 (N. America), £30.00 (Rest of World) Personal Rates, £16.00 (UK-Europe), $37.00 (N. America), £22.00 (Rest of World) (3 Please enter my subscription/send me a sample copy {3 1endose a cheque/money order payable to Blackwell Publishers 3 Please charge my American Express/Diners Club/Mostercard/Visa account Card Number... ExpiryDate ........................ Signature o.oo eee Date... NOME eae ABIES... oot ees ee eee eee eaaie eee, Postcode .......................... LT PPP Payment must accompany orders Please return this form to: Journals Marketing, Blackwell Publishers, 108 Cowley Road, Oxford, 0X4 1JF, UK. Tel: +44 (0)1865 244083 Or to: Journals Marketing, ECAF, Blackwell Publishers, 350 Main Street, Malden, MA 02148, USA. Tel: +1781 388 8200 [ SPECIAL OFFER for 1998 [BLACKWELL BLACKWELL Electronic access is included in the institutional subscription to the print edition. | Publishers | For more information, or to order a free sample copy, visit our website http://www. blackwellpublishers.co.uk ===== PAGE 53 ===== Economics on Trial by Mark Skousen THEFREEMAN JUNE 1998 Great Turnabouts in Economics, Part 11 “I used to love hedgehogs but those were ‘my salad days when I was green in judgement’. Now I prefer foxes—Smith over Ricardo, Mill over Senior, Marshall over Walras.” —MARK BLAUG! ast November, I reported on three econo- pathy with Joseph Schumpeter, Friedrich mists who courageously reversed their Hayek, and the Austrian school. published views. Now, I'd like to add a fourth: Blaug’s intellectual odyssey is curiously Mark Blaug. He is a prolific and intense’ broad: like Whittaker Chambers, he started writer, and most famous for his arduous text- out a Marxist and a card-carrying member of book, Economic Theory in Retrospect (Cam- the American Communist Party, then became bridge University Press, 1997), now in its fifth disillusioned and betrayed. He flirted with edition. Blaug is primarily a historian of eco- Freud, but now recognizes Freudian psychol- nomic ideas and as such, he is, to borrow from ogy to be a “tissue of mumbo-jumbo.” Peter Drucker, a “bystander,” an unbiased Regarding religion, Blaug “was brought up an reporter and critic of economic ideas. And my, orthodox Jew, achieved pantheism by the age does Mark Blaug write with profundity and of 12, agnosticism by the age of 15, and mili- wit. His latest work, Not Only an Economist: tant atheism by the age of 17.72 He has shift- Recent Essays by Mark Blaug, 1s one of the ed ground as frequently as he has transferred most delightful books I’ve read in a long time. allegiance: born in the Netherlands, educated I found myself making notes and exclamation in the United States, and now a resident of points on practically every page. Great Britain. As perhaps the most profound keeper of economic thought since Joseph Schumpeter, The Perversity of Ricardo, Blaug has made remarkable progress. His unrelenting search for truth has led him along Marx, and Sraffa the intellectual road from Karl Marx to Adam Blaug’s sojourn in economics is equally Smith, and even now shows increasing sym- diverse. Leaving Marx, he became a convert to the British economist David Ricardo, wrote Dr. Skousen (mskousen@aol.com) is an economist at his Ph.D. dissertation on Ricardian econom- Rollins College, Department of Economics, Winter ics, and even named his first son after him. pid Flor ida 52 > Cen ire columnist and hh But eventually he concluded that Ricardian of Forecasts ategies. He is also the author o oo. LL Economics on Trial (frwin, 1993), a review of the top economics 1 flawed and too formalistic. ten textbooks in economics. He is currently working Blaug is especially disturbed by the develop- on his own textbook, Economic Logic. ment of a perverse version of Ricardian 369 ===== PAGE 54 ===== 370 THE FREEMAN e JUNE 1998 economics known as Sraffian economics. Although belittling Mises’s methodology Sraffian economics is named after Piero Sraf- (“cranky and idiosyncratic”) and his busi- fa, author of the obscure theoretical work ness-cycle theory (“empty”), he grants Mises Production of Commodities by Means of and Hayek “the better case” in the socialist Commodities (Cambridge University Press, calculation debate. He rates Schumpeter’s 1960), which has highly influenced Marxists The Theory of Economic Development (1911) and post-Keynesians. Essentially, Sraffa uses one of the three most important books ever a Ricardian model to claim that national written by an economist. Ultimately he output is completely independent of wages, prefers Hayek: “In short, it is Hayek, not prices, or consumer demand. Accordingly, Mises, who deserves to be patron saint of governments can pursue their grandest Austrian economics.”’ redistributive schemes without damaging eco- nomic growth in the least. . In a scathing critique of The New Palgrave Incomplete Conversion Dictionary of Economics, Blaug lambastes Blaug’s conversion toward free-market cap- Sraffian economics as mathematically obtuse jta)ism is on the right track. He has gradually and irrelevant to the real world, and assails the shifted toward Adam Smith and Hayek, editors for citing Marx and Sraffa “more fre- though he is still enamored with John May- quently, indeed, much more frequently, than 5.4 Keynes, who he says caused a “perma- Adam Smith, Alfred Marshall, Leon Walras, pent revolution.” Keynes divides the time line Maynard Keynes, Kenneth Arrow, Milton petween Blaug’s two biographical works, Friedman, Paul Samuelson or whomever you Great Economists Before Keynes and Great care to name.” Economists Since Keynes. His current attitude Recently, Blaug has criticized modern €C0- js summed up as “capitalism tempered by nomics for the “noxious influence” of Swiss Keynesian demand management and quasi- economist Leon Walras in creating the “per- socialist welfarism.”s Hopefully, that’s not the fectly competitive general equilibrium model,” final word on his economic philosophy. or GE for short. Most of the textbook writers, One last note. Regarding Blaug’s intoler- including Paul Samuelson, are enamored with 3nce of religion, I'm reminded of G.K. GE, because of its mathematical precision. For Chesterton's response to H.G. Wells’s atheism: example, the perfect competition model focus- «fj G. suffers from the disadvantage that if es on the final end-state of competition, rather pe’ right he’ll never know. He’ll only know if than the competitive process itself. Blaug he’s wrong” And the last thing that Mark labels perfect competition a “grossly mislead- Blaug wants to find out is that he is wrong. [] ing concept” that ignores the role of the entre- prene He ges economists to “re te the 1. Mark Blaug, Economic Theory in Retrospect, 5th ed. (Cam- textbooks” and replace the current Walrasian bridge University Press, 1997), preface. According to the Greek poet . hedgehog knows one great thing.” the competitive process. 2. Mark Blaug, Not Only an Economist: Recent Essays by Mark Blaug (Edward Elgar, 1997), preface. 3. Mark Blaug, Economics Through the Looking Glass: The Dis- i i torted Perspective of The New Palgrave Dictionary of Economics ustri conomics (Institute of Economic Affairs, 1988), p. 15. 4. Mark Blaug, “Competition as an end-state and a process,” Not Joseph Schumpeter, F.A. Hayek, and Israel Only an Economint, pp. 78.81, Kirzner have been in the forefront of devel- 5. Ibid., pp. 90-91. 6. Ibid, p. 9. oping the Austrian view of competition. 7. Quoted in Joseph Pearce, Wisdom and Innocence: A Life of Blaug writes favorably about them all. G k Chesterton (Ignatius Press, 1996), p. 133. ===== PAGE 55 ===== FREE — From The Washington Times 4 FREE Issues of our National Weekly Edition! Now you can see why The Washington Times has become the talk of the nation! Because now you can get AIRE ——— FOUR FREE ISSUES of The Washington Times The Washington Times NATIONAL WEEKLY EDITION! It takes the best of =a RATER, WEE EON our award-winning daily news coverage and makes it available to you every week —no matter where you live! ° Try it FREE! No Cost... No Obligation! The Washington Times. It’s the newspaper they're all talking about on Talk Radio, C-SPAN, and the Sunday morning talk shows. It’s the one that’s driving Clinton, Fund-raising revelations Fr re ed i & aint Rare $4 sirais o fs nid Ct Bonior, Boxer, Daschle, and Gephardt crazy! Why? . 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The 4 sample copies will be yours to keep! ===== PAGE 56 ===== 372 THE FREEMAN -« JUNE 1998 Hood notes the ongoing assault on the Amer- BOOKS ican business system, from the American his- torians’ putdown of “robber barons” such as J.P. Morgan and John D. Rockefeller, to more contemporary putdowns of such supposedly representative entrepreneur-villains as TV’s JR. Ewing and Hollywood’s Gordon Gekko. The Mainspring of Human Progress by Henry Grady Weaver Hood applauds Weaver for setting the record Foundation for Economic Education ® 1997 of the American business system straight. ® 271 pages ® $12.95 paperback That record would not have been possible, : — Weaver argues, without the basic legal frame- Reviewed by William H. Peterson work of private-property rights and tightly constrained government. Nor would it have “There can be no progress except through the been possible without a moral framework of more effective use of our individual energies.” respect for the rights of others. Freedom can- not be separated from personal accountabili- he emblazonment of this quotation on the ty. The Ten Commandments and the biblical front cover of the new edition of Henry injunctions against covetousness, and to Grady Weaver’s classic is timely. For the “love thy neighbor as thyself” go far to thought gets to the heart of the Austrian con- explain the triumph of laissez-faire capital- cept of methodological individualism, a coun- ism. As Weaver wrote: “Your natural free- terpoint to the Keynesian macroeconomic dom——your control over your own life-energy approach that requires national planners in —was born in you along with life itself. It is Washington to manage our economy. That a part of life itself. No one can give it to you, approach ignores the role of creative, risk- nor can you give it to someone else. Nor can taking individuals who are the mainspring of you hold any other person responsible for human progress. They are the subject of this your acts. Control simply can’t be separated welcome book. from responsibility; control is responsibility.” Henry Grady Weaver (1889-1949), a Gen- There is a whiff of Hayek’s spontaneous eral Motors marketing executive who made order idea here. Weaver came out strongly for the cover of Time in 1938, saw the role of the “unplanned planning” as the secret of Ameri- individual as central in American business. can economic success. Free men and women That role can be highly constructive, cau- have the opportunity to live their lives, plan tioned Weaver, only if two conditions are their own activity, work with one another, pur- met—Ilimited government and people who sue their own happiness—all without any adhered to an ethical code. He hailed the con- overriding forced authority of government. cept of natural law and extolled the Founders’ Unplanned planning worked. political structure because it “unleashed the But Weaver is writing about much more creative energies of millions of men and than just the United States. What makes this women by leaving them free to work out their book so powerful is its historical sweep. own affairs—not under the lash of coercive Progress occurs whenever you have the ingre- authority, but through voluntary cooperation dients previously mentioned. One of his most and moral responsibility.” remarkable chapters is on the success of the Weaver did his homework well in this his- Saracens, whose moral code and minimal torical examination of the ideas and people government produced a prosperous and who built the American dream. This edition, peaceful civilization while Europe suffered with a two-page preface by FEE founder through the Dark Ages. Freedom has always Leonard E. Read, features a new and most and everywhere been the mainspring of perceptive ten-page introduction by John human progress. Hood, president of the John Locke Founda- Weaver credits Frederic Bastiat for his free- tion and author of The Heroic Enterprise. market ideas and two equally remarkable ===== PAGE 57 ===== 373 women who also guided his thinking, Isabel some industries to raise rivals’ costs and block Paterson, author of The God of the Machine, competitive entry, the environmental jugger- and Rose Wilder Lane, author of The Discov- naut first provoked outcries from firms and ery of Freedom. This new edition stands municipalities that bore heavy environmental proudly beside their works. [J costs. Speaking indirectly for their customers, William Peterson, an adjunct scholar at the Heritage auto companies, steel producers, and a host of Foundation, is the Distinguished Lundy Professor Other manufacturers called for special relief, Emeritus of business philosophy at Campbell Univer- and in some cases got it. Municipalities and sity in North Carolina. state governments asked for federal money to pay for mandated improvements; the money valves were opened. Until recently, hardly Property Rights in the Defence of anything was heard from ordinary Ameri- Nature cans—the farmers, ranchers, homebuilders, by Elizabeth Brubaker countless operators of small businesses, and Earthscan ® 1995 » 328 pages with index just plain citizens who head off to work each ® no price stated day. Diverse and unorganized, these citizens hardly understood why some major manufac- turers were so upset about environmental reg- Property Matters ulation. After all, protecting the environment by James V. DeLong made good sense, especially when someone The Free Press ® 1997 © 390 pages with index else seemed to be footing the bill. ® $27.50 But as the environmental steamroller made its mark, ordinary Americans were pulled into Property Rights: Understanding the fray. For many of them, the issue was a Government Takings and simple one: their property rights were being Environmental Regulation taken by regulation. It was happening in the . name of wetlands protection, saving endan- by Nancie G. Marzulla and gered-species habitat, preserving historic cor- Roger J. Marzulla ridors, and enhancing national landmarks sit- Government Institutes ® 1997 325 pages with index ated near their homes. * $79.00 Across the nation, many people came to realize that they were bearing the cost of pro- viding public benefits, and contrary to the Constitution, they were not being compensat- t has now been almost three decades since ed when their property was taken for public the beginning of the federal environmental use. The resulting public outcry spawned hun- misadventure, a period that saw the rise of the dreds of grassroots property-rights organiza- regulatory state and the erosion of private- tions, and eventually generated a struggle property rights. During this time, federal nationwide to protect private property. statutes, regulations, and centralized control Significant parts of this struggle are have systematically replaced a diverse mix of recounted in three important books. Elizabeth decentralized common-law rules, state Brubaker’s Property Rights in Defence of statutes, and local ordinances, along with cus- Nature addresses the Canadian experience and toms and traditions that previously protected emphasizes the important role played by tradi- property rights. With the federal takeover, the tional private-property rights in protecting rule of law, which is based on protection of environmental quality. Brubaker’s book focus- property rights, was replaced by the rule of es on the common law. But much more than a politics, which respects few property-rights primer on nuisance and trespass, this highly boundaries. readable and heavily documented volume con- Fueled by a combination of environmental vincingly demonstrates the power of common hysteria, political opportunism, and efforts by law—the law of the people—to protect envi- Reviewed by Bruce Yandle ===== PAGE 58 ===== 374 THE FREEMAN e JUNE 1998 ronmental rights. Replete with case-law ation. DeLong carries the reader through vignettes, the book shows how air and water issues involving land-use planning, zoning, pollution was countered by common-law artists’ rights, Indian rights, and intellectual rules, how defense of property rights in trout property, always building a strong case for held by fishing clubs overcame the polluting private markets, property-rights enforcement, tendencies of cities and industries, and how, and the rule of law. in many cases, common-law remedies were Nancie and Roger Marzulla, widely known harsher and the rules stricter than those that for their leadership and their organization, came with statutes and regulation. Defenders of Property Rights, have provided James V. DeLong’s Property Matters, a primer and more in their book, Property which addresses the U.S. experience, provides Rights: Understanding Government Takings a powerful companion volume to Brubaker’s and Environmental Regulation. Taking a con- Canadian story. Writing in a style that is as stitutional approach, the Marzullas first define entertaining as it is logical, DeLong offers property, explain the fundamental social role countless short episodes to teach his lessons. played by property rights, and then quickly He first offers some pointers on property focus on a central question: What is a taking? rights and then examines the fundamental The answer is developed in good lawyerly concern for and importance of property rights fashion so that the nonlawyer will understand held by the nation’s founders. Along the way, and appreciate the complexities involved. he introduces the ideas of John Locke and the The Marzullas give a highly focused treat- legal synthesis provided by Blackstone. ment of environmental regulation and devote DeLong’s examination of the record—what separate chapters to wetlands and endangered- has actually been accomplished as opposed to species regulation. Unlike DeLong, they what some politicians and environmentalists delve deeply into case law on these topics and claim is being accomplished—destroys the take a similar approach when addressing myths associated with the Endangered Superfund and land use and zoning. Their last Species Act and wetlands protection. In short, few chapters address legal procedures, diffi- the rhetoric is great, but the record is dismal. culties to be encountered when litigating tak- In the case of the Endangered Species Act, ings cases, and what appears to be emerging what might be an asset—a species that could on the property-rights legislation front. be protected—becomes a liability when free- Appendices provide President Reagan’s exec- dom to manage land is taken in the name of utive order on takings, which sought to rein in species protection. The wetlands story is even the regulators, as well as two recent and key worse. No wetlands legislation has ever been Supreme Court decisions on takings, the enacted. Instead, a body of administrative law, Dolan and Lucas decisions. with criminal sanctions, has emerged from the Friends of liberty who study these highly bureaucracy. DeLong explains that if the rules readable volumes will be rewarded for the were enforced using the most expansive wet- effort. CJ lands inter pretation, 75 percent of the United Bruce Yandle is a professor of economics and legal States territory could become subject to sudies at Clemson University. Corps of Engineers dictates. The Corps has encroached on the tradition- al rights of farmers, ranchers, and ordinary citizens who find their right to productive use of land taken by regulation. People building homes, constructing duck ponds, and plowing land find themselves in violation of rules, and in some cases sentenced to federal prisons. All this is happening, according to data cited by DeLong, while the amount of wetland is rising, not falling, as a result of wetland cre- ===== PAGE 59 ===== BOOKS 375 He takes issue with John F. Kennedy’s ide- alistic appeal, “Ask . . . what you can do for your country.” Claptrap, says Contoski, who offers a better alternative: “Ask what you can Makers and Takers: How Wealth and Progress Are Made and How They Are Taken Away or Prevented by Edmund Contoski do for yourself” The contrasting cases of American Liberty Publishers ® 1997 ® 464 pages John Fitch and Robert Fulton illustrate his ® $24.95 point. Fitch developed the steamboat in 1785 and offered the invention to “the country” Reviewed by Daniel Hager and various state legislatures, but was contin- ually stymied by indifferent politicians. Two an is distinguished from the lower decades later, Fulton refined the concept, Mx of animals because of the frontal received a patent, and launched water trans- and prefrontal lobes in his brain that foster Pportation’s Steam Age: “Hoping to reap prof- thinking ahead and planning. Man becomes a its for himself, Fulton did more for his coun- maker, rejecting momentary gains for the try incidentally than Fitch did by intention adoption of long-range goals, while the lower and years of self-sacrificing perseverance.” animals are merely takers. Government, inher- But now big government has the upper ently an instrument of force and plunder, con- hand, achieved through what Contoski terms stitutes a regression to a lower state of being, the collectivists’ “quiet conquest” of lower If humans are to prosper and thrive, govern- education and their domination of higher edu- ment must be kept in tight check, just as the cation, as well as most information media. Founding Fathers of the nation advocated. Constant propagandizing makes it easy for In Makers and Takers, author Edmund Con- government to expand through economic reg- toski offers a timely warning. While the phi- ulation. Contoski describes regulation as a losophy of individualism promoted the form of coercion fueled by the alleged need to nation’s rapid advancement, America has now Protect “the common good.” Actually, it’s a imperiled itself by turning toward collec- System in which “some people obtain materi- tivism. The political drive for “diversity” aims al benefits by employing force against others.” at social and economic equality, negating what ~~ The author devotes many pages to demol- Madison cited as “the diversity in the faculties ishing excuses for regulatory intrusion. For of men.” Contoski writes, “Equal rights, cor- example, he cites Lawrence Reed’s refutation rectly speaking, mean only that men are enti- in The Freeman (November 1994) of Upton tled to equal protection against force, which Sinclair’s truth-straining “exposé” of turn-of- means: the liberty to be unequal in every other the-century meatpacking houses that led to respect. Any attempt by government to make the 1906 Meat Inspection Act and notes that men equal in any other respect necessarily vio- its legislative successor, the ineffectual lates their rights, their liberty” The implica- Wholesome Meat Act of 1967, was similarly tions of this attack on equality before the law driven by distortions of the truth. He also gravely concern the author. quotes from Edith Efron’s exhaustively docu- According to Contoski, democracy needs mented and lamentably neglected The Apoca- to be limited because it is based on the falla- Iyptics: Cancer and the Big Lie to counter cy that “wisdom resides in the majority, . . . public hysteria about synthetic chemicals, and that wisdom is defined by popular opinion,” in he disproves much more hokum. defiance of Newton's demonstration of “the The collectivists have indoctrinated enough universal nature of truth.” He asks whether generations of Americans that the nation’s people would care to have a decision on pro- original guiding principles have been nearly posed surgery submitted to a popular vote, expunged. Contoski is right on target in writ- concluding that “It would seem desirable to ing, “The sad fact is that most Americans have as few decisions as possible determined have never really understood the American by democratic vote.” Alas, our trend runs in system. They were fortunate enough to have the opposite direction. been born into it and benefited from it, but ===== PAGE 60 ===== 376 THE FREEMAN e JUNE 1998 they didn’t really understand it.” Most of our this new volume from the Future of Freedom citizens’ thinking is so ingrained with statist Foundation. Edited by FFF president Jacob assumptions that they cannot conceive of any Hornberger and Hillsdale College economics alternative and thus fear freedom. professor Richard Ebeling, the book brings This hard-hitting book can break apart together 14 essays calculated to get people to encrusted thought patterns. It refutes an enor- think about gun control the way they would mous amount of statist disinformation and think about a home do-it-yourself project: explains that people should not fear the mak- will it work and what will it cost? ers—the capitalists who bring us prosperity— When the subject of gun control comes up, but instead worry about the takers who the words “Second Amendment” are rarely far obstruct them. Read this superb book, then behind. Opponents of gun control argue that pass it along. [J among its many costs is the trashing of yet Daniel Hager is senior research associate with another section of the Constitution. Gun- Patrick Henry Associates in East Lansing, Michigan. control advocates wave away that argument, claiming that it wasn’t meant to guarantee an individual right to possess firearms. In one of the essays, “What the Second Amendment Means,” Freeman editor Sheldon Richman annihilates their claim. Richman demon- The Tyranny of Gun Control edited by Jacob G. Hornberger and Richard M. Ebeling strates that the pro-gun-control interpretation The Future of Freedom Foundation © 1998 is utterly indefensible and closes the debate * 93 pages ® $15.95 cloth; $9.95 paperback with this crusher: even if you believe that the : Second Amendment protects only the govern- Reviewed by George C. Leef ment’s “right” to have a militia, where else in the Constitution is there any enumerated Pere are eternally prone to wishful think- power authorizing Congress to regulate or ing. It’s usually harmless because pipe prohibit individual ownership of guns? There dreams aren’t often turned into action in our is no such grant of authority. private lives. When an individual knows he Another key gun-control issue is the ques- will bear the costs and suffer the conse- tion of its impact. Many people want so badly quences of some action, reality quickly to reduce violence that they merely assume intrudes and he asks, “Will this really produce that gun control actually does so. This is wish- the results I want? What will the costs really ful thinking at its most dangerous. Jarret be?” Wollstein’s essay, “Will You Be Safer If Guns Politics, however, cuts the connection Are Banned?” takes on this notion. Wollstein between individual action and consequences. writes, “Paradoxically, although firearms do Because “the government” takes the action not increase crime and violence, gun control and appears to bear the cost, most people laws do. Throughout the United States, when don’t ask those questions. Politicians, there- strict gun-control laws are passed, crime and fore, can get away with selling snake-oil violence get worse.” He proceeds to support remedies; they know that most voters are his contention with evidence drawn from suckers for grandiose plans wrapped in good many different parts of the nation. intentions. People wish for solutions to prob- In another excellent essay, “The Assault lems and rarely ponder whether the proposed Weapons Scam,” James Bovard exposes the plans will really work and what they will cost. intellectual dishonesty in the anti-gun lobby’s That is why they keep trying to alleviate manufactured hysteria over “assault rifles.” In poverty with welfare and minimum-wage politics, labels and perceptions are far more laws. That is why they keep trying to improve potent than reality. Knowing this, gun-control health care through socialized medicine. And advocates invented the meaningless term that is why they keep trying to make the coun- assault rifle. The vagueness of the resulting try safer through gun control, the subject of statutes has given officials, as Bovard writes, ===== PAGE 61 ===== BOOKS 377 “arbitrary power to pick and choose which guns to ban and which gun owners to arrest and imprison.” So-called assault rifles are vir- tually never used in crimes (and of course, the law won’t do anything to prevent a deter- by Edmund S. Phelps mined criminal from getting and using one if Harvard University Press ® 1997 © 198 pages he really wants to), but this episode has e $24.95 allowed a great expansion of government power over nonviolent gun owners. Reviewed by Charles W. Baird Looking at history is often an antidote for wishful thinking, and Benedict LaRosa’s J conomst Edmund Phelps proposes a new splendid “Gun Control: A Historical Perspec- panacea for the troubles and pathologies tive” provides a potent tonic. Gun control (or, of “disadvantaged” people in America—fed- going back far into history as LaRosa does, eral employment subsidies for low-wage weapons control) has been a favored policy of workers. This book has delighted liberal inter- rulers who want a meek, compliant populace ventionists, but I find it appalling. under their control. He includes an examina- Phelps begins by defining the “disadvan- tion of Switzerland, where gun ownership is taged” as those in the bottom one-third income nearly universal. “The Swiss do not have an group. The subsidies he proposes would be army—they are the army,” one official Swiss credits against payroll and corporate tax liabil- publication proudly says. Despite the fact that ities for “qualified employers” who take on Switzerland bristles with privately owned disadvantaged people for “eligible jobs.” The firearms of all kinds, gun-related violence is credit would start at three dollars an hour for a far lower there than in most nations with dra- worker whose “private productivity” is valued conian gun laws. at four dollars an hour, and gradually decline This is just a sampling of the useful anti- at a decreasing rate to a $0.06 subsidy for a gun-control material in this book. I only wish worker whose private productivity is valued at that there were more of it. An essay exploring $12. He emphasizes that, unlike welfare, these why policies to punish wrongdoing are neces- subsidies could not be exploited by people sarily superior to policies intended to prevent who refuse employment. it would have been a good addition. Still, if = Phelps asserts that his employment subsi- you want to be well armed in the battle dies would “empower capitalism” by encour- against those who would prevent you from aging the “disadvantaged” to work, increase owning firearms, this is an excellent book to their self-esteem, and make them more self- have around. [J supporting (hence the subtitle of the book). George Leef is president of Patrick Henry Associ- Once this happens there will be a greatly ates: Liberty Consultants in East Lansing, Michigan, diminished role for welfare, since only the and book review editor of The Freeman. disabled would need it. Phelps provides a justification for his subsi- dies based on the welfare economics of A.C. Pigou. He argues that a disadvantaged work- er’s “social productivity” is the sum of his “private productivity” and his “external pro- ductivity.” Private productivity is “the produc- tivity within the business.” It is what the worker’s labor services are worth to the employer. External productivity is the addi- tional benefit enjoyed by society as a whole because of the worker’s increased ability “to support [himself] and exercise responsibility as a citizen, community member, parent and Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise ===== PAGE 62 ===== 378 THE FREEMAN e JUNE 1998 spouse.” A subsidy, “calibrated to the correct apparently necessary to say one more time size,” would supposedly internalize this “eter- that if successful people really thought that nal productivity.” they should help less successful people, they Such a scheme ignores all that we have would do so. They don’t need to wait for tax- learned from the public-choice school of ation to act. political economy about government failure Phelps also asserts that his subsidy scheme and from FA. Hayek about the division of “fits the founders’ conception of our govern- knowledge. Every government subsidy comes ment.” He says that Jefferson’s assertion in the with increased government regulation. Just Declaration of Independence of an inalienable what is an “eligible job”? Who are the “qual- right to the pursuit of happiness necessarily ified employers”? Is there to be yet another implies a right to a rewarding job. This is pre- division of the Department of Labor charged posterous. To the founders, “rights” referred with certifying jobs and employers? Phelps to a freedom of peaceful action that is prior claims his plan would pay for itself through to, and independent of, government. The savings on welfare and crime. However, once founders’ rights impose only a negative oblig- such a scheme is put into place, interest ation on others to abstain from interfering. groups like labor unions would advocate Government’s principal job is to enforce those expansion of the subsidies, just as they have rights. Phelps’s subsidies are positive “rights.” successfully done with the minimum-wage They impose burdens on some to provide for law. The subsidies would inevitably become others. The rights of those forced to pay con- just another increasingly costly feature of the flict with the “rights” of those who are privi- welfare/transfer society. leged to receive. Moreover, how can government calibrate Perhaps the silliest claim in the book is the “correct” size of the subsidy for each Phelps’s assertion that Keynes, along with worker in every job? Phelps’s arbitrary sliding Adam Smith and John Stuart Mill, was a scale of subsidies would apply to all workers “classical economic liberal.” That says it at all times and places irrespective of their all. unique cir cumstances. When we ICCOBMIZE Charles Baird is professor of economics and director that decisions will be based on politics, n0t 1 The Smith Center for Private Enterprise Studies at economics, there is nothing left of the Phelps California State University, Hayward, and a Freeman subsidies to recommend. columnist. But there is much more to criticize about this book. For example, Phelps writes: “In acting through the government to pull up the How Nations Grow Rich: rewards and thus to stimulate the participation The Case for Free Trade and employment of low-wage workers, the more fortunate members of the labor force by Melvyn Krauss would be removing a source of some embar- Oxford University Press ® 1997 © 195 pages rassment. The more advantaged in society ° $22.50 would gain pride and self-respect from having met their end of the social contract—of hav- ing acted justly. If so, they will be willing to pay something to achieve this satisfaction in ver since the modern nation state the form of higher taxes.” E emerged half a millennium ago, the ques- He apparently believes successful people tion of how nations grow rich has been bound are merely lucky. In fact, of course, most suc- up with international trade. The battle line in cessful people earned every penny they have the debate, from the time of the mercantilists by perfectly honorable means—voluntary and Adam Smith to the controversies today exchange. They did well for themselves by about GATT and NAFTA, has been whether providing opportunities to others. I can think nations grow rich by restricting free trade or of no better grounds for self-respect. It is by engaging in it. Reviewed by Daniel T. Griswold ===== PAGE 63 ===== BOOKS 379 Professor Melvyn Krauss’s new book, How the welfare state have created the high unem- Nations Grow Rich: The Case for Free Trade, ployment we see today in Western Europe, won’t end the debate, but it does provide a which in turn foments domestic pressure to readable and well-argued defense of free trade curb imports in a misguided effort to save on just about every point of current con- jobs. The welfare state’s web of environmental tention. As an emeritus professor of econom- and labor regulations that burden domestic ics at New York University and the author of producers invites further protection against previous books on protectionism, foreign aid, rival industries in less regulated, and typically and NATO, Krauss brings a deft hand to the poorer, countries. Adding to the protectionist task. Throughout his latest book, the author pressure are domestic subsidies to farming illuminates everything he surveys with clear and other sectors, which then demand protec- writing and sound economic thinking. tion to maintain artificially high prices. Krauss begins at the beginning, by explain- Krauss doubts that the welfare state and ing the nearly two-century-old theory of com- free trade can co-exist indefinitely. “The parative advantage in layman’s language. The dilemma posed by this development is clear. fundamental economic argument for free Because of its evolving protectionism, the trade is that it allocates resources more effi- growth of the welfare state now threatens the ciently by allowing people and nations to spe- very specialization and interdependence that cialize in what they do best. is the basis for Western prosperity in the first We don’t trade with people in other nations place. The manner in which the Western to create more jobs. We trade to make our- industrial states resolve this dilemma to a selves better off. “Free trade does not create large extent will determine their continued jobs—it creates income by reallocating or prosperity,” he warns. transferring jobs from the lower productivity In the United States, the tension between to the higher productivity sectors of the econ- domestic intervention and free trade can be omy. The argument for free trade—at least in seen in the effort to “export” our environmen- the standard theory—is an efficient allocation tal regulations to other countries. Among the of resources argument. Such reallocation lobbying groups opposed to NAFTA and increases income by increasing the average other trade initiatives are environmental productivity of the nation’s stock of produc- groups who worry that competition with less tive resources,” Krauss writes. developed nations will put downward pres- After his opening footwork, Krauss deliv- sure on U.S. environmental standards in a reg- ers a roundhouse right to the Clinton adminis- ulatory “race to the bottom.” To placate the tration for its “managed trade” philosophy, eco-protectionists, the Clinton administration followed by a series of quick jabs against the wants to make the “harmonization” of regula- false arguments for protection. Among them tions a part of any new trade agreements. is the assertion that free trade is only valid if Krauss argues that free trade need not lead to it is “fair trade.” “This argument—that equity a lowering of environmental standards, but demands the United States protect its produc- rather to a specialization of standards, with ers when foreign countries protect theirs—has the more regulated countries expanding their a certain appeal but is nonetheless fallacious. low-polluting industries and other, less regu- Free trade is fair trade to those whom it counts lated countries expanding production of the most to be fair to—the domestic con- goods that produce relatively more pollution. sumer,” he writes. Other protectionist “tricks” In the final three chapters, Krauss examines Krauss exposes are the infant-industry argu- the wreckage of America’s foreign aid pro- ment, the “cheap labor” fallacy, and anti- grams, the demise of socialist planning, and dumping laws. the rise of regional trade agreements, includ- One of the most insightful sections of the ing a critique of the European Union’s drive book is Krauss’s analysis of how the modern for a single currency. welfare state has corroded support for free My only real complaint about How Nations trade. The tax bite and labor-market rigidity of Grow Rich is that Krauss did not write more ===== PAGE 64 ===== 380 THE FREEMAN e JUNE 1998 of it. To be specific, his text is overstuffed Even this complaint should be taken as a with extended quotations, from the daily press compliment to Melvyn Krauss. In How as well as academic sources. It’s fine to quote Nations Grow Rich, his own words are almost a few lines from Milton Friedman, as Krauss always sufficient to carry the argument in does to good effect in the section on anti- favor of the liberty to trade and invest with dumping laws. But the book would have been people beyond our borders. Ol even more readable, and about 20 pages papel Griswold is associate director of the Center shorter, without the frequent quotes from the for Trade Policy Studies at the Cato Institute. daily financial papers. Available from FEE! LAW AND REVOLUTION: The Formation of the Western Legal Tradition by Harold J. Berman “A magnificent volume, broad in scope and rich in detail; this may be the most important book on law in our generation.” —American Political Science Review n this era of nation-states, we think of law as a body of rules that are centrally planned and LAW and imposed upon citizens by REVOLUTION sovereign governments. Harold The Formation of the Berman's remarkable and award- 1e Formation of the LL. . Western Legal Tradition winning book refutes this myth. Berman shows that law in the West HAROLD J. BERMAN is historically not the product of sovereign nation-states but, rather, of competition among different law-supplying institutions. Berman's research uncovers the exciting fact that during the law’s formative era centuries ago, the crown competed with the church, with feudal manors, with cities, and with societies of merchants in supplying law. The lesson is profound: law generated by competing law-supplying CPN NIT institutions is likely to be superior mE ~ to law produced monopolistically and centrally by a sovereign. ISBN 0-674-51776-8 ¢ 672 pages © indexed ® maps and figures ¢ paper $19.95 TO ORDER, CALL (800) 452-3518, FAX (914) 591-8910, OR E-MAIL freeman@fee.org ===== PAGE 65 ===== possible. Certainly other positive economic CAP ITAL $8BN 2 benefits of lesser magnitude are possible. Sema: Together, th dd || $200 LETTERS: lion an amount hat Bill Gates could just “In Defense of Misers” as easily put in a vault under his house. In response to the authors’ question, “which one of the two did more to benefit others?” I would say we don’t know because we don’t To the Editor: oo know what kind of philanthropist Mr. P is. In Since I work for an organization that stud- ost cases, there is probably no way to mea- 168 philanthropy, I find Candace Allen and gyre the economic benefits that good philan- Dwight R. Lee's article (“In Defense of Mar- thyopists provide. But surely the spillover kets and Misers,” April 1998) interesting. I effects of philanthropy at least sometimes agree with their argument that Mr. M (the provide more in benefits than an equivalent miser) provides a total benefit of $10 billion 4m ount of money kept in a vault. to others by hoarding his money, thus reduc- Some of the authors’ other remarks seem ing the money supply and making goods more gyergeneralized: affordable. But I don’t think they have shown “Without the feedback of profit and loss, that Mr. P (the big spender and philanthropist) [nonprofits] don’t know if they could be pro- “actually does less good than the unheralded gycing more value by using their resources in contribution of Mr. M,” that “Mr. M is actual- sper ways.” But certainly some nonprofits try ly providing more benefits to others,” and that 4jjocating their resources to different pro- “misers provide benefits to others more effec- grams and have the results of this measured tively than do philanthropists.” by evaluation studies. These studies probably I think that depends on whether Mr. P's arent as meaningful as profit-and-loss state- philanthropy is wise or ill considered. To take ments, but they do provide some useful infor- two current examples, billionaire Ted Turner ation for making program improvements. has pledged to give a billion dollars to the “Charities lack the incentive to direct United Nations over the next ten years. Unfor- resources to their most productive employ- tunately, I think most of this money will have pens” Granted, it is better to rely on the prof- little effect and perhaps some negative effects jt motive to allocate resources than the good- (e.g. promoting dependency rather than €COo- will of nonprofit executives, boards, and staff. nomic growth in third-world countries by But surely there are many people of goodwill merely providing material assistance). But jn the nonprofit sector who seek to allocate Bill Gates’s pledge of $200 million to provide resources efficiently and to avoid extravagant computers and Internet access to public gets. libraries in low-income communities might “Much of it [charitable contributions] goes have significant positive effects. into appeals for more contributions.” 1 don’t To take a hypothetical example: suppose 2 know if anyone has done a scientific survey, but student becomes interested in biomedical fund-raising costs can vary from almost noth- research as a result of using these computers ino to almost the entire budget of a nonprofit. and the Internet. Suppose this interest might Dan Oliver never have been sparked without these com- Research Associate puters (the student becomes an accountant Capital Research Center instead). The student goes on to study medicine Washington, D.C. in college and later discovers a relatively inex- pensive cure for a major disease. In just the first few years after the cure is found, over $200 Candace Allen and Dwight R. Lee respond: million is saved in health-care costs. While this All authors hope that their work will moti- example is probably not very likely, it is at least vate thoughtful comments by thoughtful peo- 381 ===== PAGE 66 ===== 382 THE FREEMAN e JUNE 1998 ple, and so we were delighted to see the we agree with him that “there are many peo- response to our article by Dan Oliver. ple of goodwill in the nonprofit sector who The main point of our paper is that markets seek to allocate resources efficiently and to and misers provide far more benefits than they avoid extravagant costs.” But in terms of get- are commonly credited with, because those ting the job done, we feel that marketplace benefits are widely dispersed and difficult to incentives trump the “goodwill in the non- trace back to their origins. And indeed, we profit sector.” We also agree with Oliver on believe, and argued, that markets and misers the lack of “a scientific survey” backing up accomplish more good than politics and phil- our claim that charitable organizations spend anthropists even though the benefits of the lat- more on fund-raising activities than private ter two are more appreciated because their firms spend on advertising. We have seen benefits are concentrated and easily visible examples of extraordinarily large amounts of and traceable to their source. Thus, more good charitable revenues going back into fund- is accomplished indirectly through the market raising, and, for reasons discussed in our process than directly by either politicians or article, feel our claim is justified. But we rec- philanthropists, although of the two, we prefer ognize that this is ultimately an empirical the philanthropists. issue. Oliver’s first concern with our paper is that We appreciate Oliver’s comments. And we we undervalue the potential benefits of phil- want to emphasize that our paper 1s in no way anthropists; the gifts of some philanthropists an argument against philanthropic activity. can have spillover effects that are greater than People should be free to do what they want the “equivalent amount of money kept in a with their money, including giving it to the vault.” There are no doubt cases in which this United Nations. And, as opposed to Turner’s is true, as suggested by Oliver’s hypothetical gift, we are confident that much philanthropic student who discovers the cure for a major activity is socially beneficial. But it’s misers, disease because of a philanthropic gift. But not philanthropists, who need defense. By our point was that the money kept in the vault defending misers we aimed at making a lowers the price level a bit, which presents broader point on the advantages we all realize opportunities for people that can also have from the dispersed and indirect benefits of the desirable spillover effects. These opportuni- marketplace. OJ ties are easy to ignore because of the diffused (Candace Allen is a member of the affiliate econom- nature of benefits created (exactly our point), ics faculty at the University of Southern Colorado. but easy to appreciate once we consider the Dwight Lee, a contributing editor of The Freeman, importance of marginal impacts. For example, is Ramsey Professor of Economics and Private Enter- there are millions of young people deciding Ps a! the University of Georgia.) whether to go to college, or take an addition- al course at the expense of less part-time work. Some of them will be on the margin of choice, and so the small per-capita increase in well-being provided by a miser can make a difference in how much education they get. _ Just as in the case of Oliver’s student, some of Brevity is encouraged; longer letiers may “our” students can also go on to create enor- be edited because of space limitations. mous benefits because of the marginal impact | Address your letters to: The Freeman, FEE, of the miser. 30 S. Broadway, Irvington-on-Hudson, Oliver agrees with us that the incentives of | New York 10533; E-mail: freeman@fee.org; the marketplace do the best job directing | fax (914) 591-8910. resources into their most valuable uses, and We will print the most interesting and provocative letters we receive regarding Freeman articles and the issues they raise. ===== PAGE 67 ===== The Pursuit of Happiness by Edward W. Younkins Cinema and the Capitalist Hero he businessman has not fared well in depicted in the film as an honorable activity in film. Moviemakers have often attacked a benevolent, life-affirming universe. business and industry for destroying an old In Other People’s Money, a 1991 film based communal order based on equality and have on Jerry Sterner’s play, Lawrence “Larry the lamented the businessman’s preoccupation Liquidator” Garfield, portrayed by Danny De with material success and the dominance of Vito, wants to take over an outmoded, debt- large organizations in people’s lives. free company that has a lot of cash. Larry However, some films cast the businessman plans to sell off the assets. The company’s in a more favorable, even heroic, light by aging chairman, Andrew “Jorgy” Jorgenson emphasizing the possibilities of life in a free (played by Gregory Peck), is a traditionalist society, the inherent ethical nature of capital- and supporter of community values who ism and the businessman, and the strength doesn’t want to see hundreds of people out of and self-sufficiency of the hardworking work. The climactic scene is a stockholders’ entrepreneur. meeting—a fight for control of the board of directors between Larry, who would make the stockholders money, liquidate the company, and shift the resources to better uses, and The corporate raider has been a tempting Jorgy, who would continue in a dying indus- target for film makers, but not all movies por- try (copper wire). The film portrays Garfield tray this form of entrepreneurship as corrupt. heroically: he makes money for the stock- In Cash McCall (1959), based on the 1955 holders—including retired people who aren’t novel by Cameron Hawley, James Garner plays rich—while freeing resources to produce a misunderstood tycoon and financier who is things that people want more than obsolete viewed by many as an unscrupulous robber copper wire. baron who takes over companies, lays off Both films accurately portray takeovers as employees, and sells the firms for large profits. nothing more than changes in ownership of McCall is actually a shrewd, productive, and assets, necessary for the efficient operation of efficient businessman who rebuilds acquired a market economy. companies, operates them more effectively than their incumbent management, has high standards of personal and business ethics, and creates wealth without guilt. Commerce is Tucker: The Man and His Dream (1988), directed by Francis Ford Coppola, tells the Edward Younkins is professor of accountancy and true story of Preston Tucker (played by Jeft business administration at Wheeling Jesuit Universi- Bridges), a charming, persuasive, optimistic, ty, Wheeling, West Virginia. innovative, and visionary maverick who chal- 383 The Heroic Corporate Raider The American Dream ===== PAGE 68 ===== 384 THE FREEMAN e JUNE 1998 lenged the “Big Three” establishment by cre- and the laborers unemployed. Management ating a utopian automobile. Tucker is por- and labor are guilty of thinking of only the trayed as a Capraesque hero who fights the immediate effects of the breakthrough on forces that eventually crush his dream. The themselves as clothing makers; they do not film celebrates the American can-do spiritand consider that consumers will now have the entrepreneur as the driving force of capi- clothes and the other products that can be talism and wealth creation. According to the made with the newly freed-up resources. film, Tucker was the victim of Detroit and Although his fabric eventually falls apart due Washington, illustrating the need to separate to a flaw in the formula, the heroic inventor is economy and state. not discouraged. At the end of the film he is An American Romance, a 1944 film direct- shown working to correct the error. ed by King Vidor, celebrates the American In Sometimes a Great Notion (1971, ak a Dream by following its immigrant hero, Never Give an Inch), based on the novel Steve Dangos (played by Brian Donlevy), by Ken Kesey, Henry Fonda plays Henry from his arrival at Ellis Island through his Stamper, the head of a small, independent, ascension from miner to steelworker to fore- family-owned logging business in Oregon. man to automobile entrepreneur who uses his Hank (Paul Newman), Henry's elder son, rep- knowledge of steel to build a safer, full-frame resents individualism and self-sufficiency. car. This film portrays America as the land of The hardworking Stampers are heroic busi- unlimited possibilities and views capitalism nessmen who are anti-union, anti-socialist, as the social system that best provides free- and unamenable to anyone, including the gov- dom and the opportunity to pursue one’s ernment, who tries to tell them what to do. vision of happiness. The family motto is, “Never give an inch.” Mac (1993) is the story of a hardworking The unions strike the small company and Italian-American carpenter who realizes his other logging operations throughout the dream of becoming a contractor. John Turtur- Northwest. The Stampers, who pride them- ro plays Mac and directs the film of this selves on honoring their contracts, continue uncompromising, honest, focused, and hard- their operation despite union sabotage and working man with extremely high standards. violence. For Mac there are only two ways to do a job, “the right way and my way and they're the Naaded: More Pro-Capitalist same.” The moral of the story is that each per- . son has a God-given vocation and can con- Film Heroes tribute to the world by using his talents to the Films have depicted business people as best of his ability. over-materialistic, greedy, miserly, villainous, corrupt, unethical, hypocritical, insecure, Individualism and insensitive, anti-culture, exploitative, smaller Independence than life, repressed, and subservient to the establishment. Fortunately, some films, more The Man in the White Suit (1952) stars Alec than I have recounted here, have emphasized Guinness as Sidney Stratton, an entrepreneur- their heroic traits and accomplishments. ial, visionary chemist who invents a fabric Cash McCall, Hank Stamper, Steve Dan- that will not wear out, stain, or become dirty. gos, and the cinematic Preston Tucker are Leaders of both the textile mills and labor great role models. Hollywood should give us unions fear that the industry will be ruined others. J]